Commodities Corner: Qatar’s OPEC exit raises the possibility of the oil cartel’s demise, experts say

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Qatar’s decision to leave the Organization of the Petroleum Exporting Countries at the start of the new year isn’t expected to have a big impact on Middle Eastern oil output, but it does reveal cracks in the nearly 60-year old organization that could eventually lead to its demise.

Qatar leaving OPEC is the “equivalent of getting a backbone fracture,” Naeem Aslam, chief market analyst at ThinkMarkets UK, told MarketWatch. “The organization may not be able to last.”

“The message it has sent to other members is that they are better off without the organization rather than inside it. It has laid down the blue print and others will follow,” he said.

The move follows a roughly 30% decline in oil prices from nearly four-year highs in October, which has rattled confidence in OPEC’s ability to stabilize the market. Global benchmark Brent crude LCOG9, +4.96%  fell from a settlement of $86.29 on Oct. 3 to a more than one-year low of $58.76 on Nov. 28. U.S. benchmark West Texas Intermediate crude CLF9, +4.40%  sank to $50.29 in late November to its lowest since October 2017, from $76.41 in early October.

The announcement also comes ahead of a much-anticipated final meeting of the year for OPEC and its oil-producing allies that begins Thursday.

OPEC is expected to cut production in an effort to stave off a global glut in supplies. The risk of an oversupply emerged after the group and its allies, including Russia, pledged in June to raise production, in part due to an expected loss of oil from U.S. sanctions on Iran’s energy sector. Before that June increase, oil producers had been cutting back production for more than a year to get rid of an oversupply.

Read: Here’s what’s at stake in the oil market when OPEC and Russia meet

Also see: Oil prices rally by 4% as Russia, Saudis signal output curbs

Qatar’s decision, however, shouldn’t come as a huge surprise, given that it’s OPEC’s smallest Middle East oil producer and the group’s fifth smallest producer overall, with 2018 oil production estimated at 600,000-650,000 barrels a day, or less than 2% of the group’s oil output, according to Lynn Morris-Akinyemi, research analyst, MENA upstream, at Wood Mackenzie.

‘The message [Qatar’s OPEC exit] has sent to other metals is that they are better off without the organization rather than inside it. It has laid down the blue print and others will follow.’

Naeem Aslam, ThinkMarkets UK

While Qatar’s Minister of State for Energy Affairs Saad Sherida al-Kaabi said the withdrawal decision reflects his nation’s desire to focus on plans to develop and raise its natural-gas production, analysts raised suspicions that the move has just as much to do with its dispute with Saudi Arabia.

Saudi Arabia, along with United Arab Emirates, Bahrain and Egypt in 2017 cut diplomatic ties with Qatar, claiming that it supported terrorist organizations.

Individual interests among major oil producers have also changed since OPEC was established in 1960 by founding members Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. Qatar joined the cartel a year later.

To be sure, Qatar isn’t the first member to leave the 14-member oil-producer group: Indonesia joined in 1962 but suspended its membership twice, most recently in late November of 2016, according to OPEC’s web site. Others including Gabon and Ecuador halted their memberships in the 1990s only to return in later years.

On Monday, OPEC said it received Qatar’s notice of its intention to leave the group and said every member country has the “sovereign right to withdraw.” It said it respects the country’s decision and noted that the move does not require approval from the organization.

“In decades past, all the OPEC nations generally recognized that their individual interests were largely the same as the cartel’s in general—a tight rein on the oil market guaranteed a steady reliable flow of money into the treasuries of member nations,” Jeff Yastine, a senior analyst at Banyan Hill, told MarketWatch “But these days, I believe there’s a gnawing sense that what’s in Saudi Arabia’s best interests … [is] not necessarily in the best interests of its OPEC partners.”

Yastine said he believes there is a “possibility that OPEC breaks up, especially if Saudi Arabia continues under the ham-fisted leadership of [Mohammed bin Salman].” The Saudi crown prince aims to lessen Saudi reliance on petroleum.

Yastine also said OPEC doesn’t necessarily have to “breakup in an active way, but instead merely drifts into irrelevancy.” The world is “shifting toward alternative sources of energy [and] OPEC has less of a reason for its existence as a cartel.”

In early November, The Wall Street Journal reported that Saudi Arabia’s top government-funded think tank was studying the possible effects on oil markets of a dissolution of OPEC, but the news report also said — citing people familiar with the matter — that the research project didn’t reflect an active debate inside the government over whether to leave OPEC in the near term.

“Many Americans, especially those of us who remember the energy shocks of the 1970s, will doubtlessly cheer the potential breakup of OPEC, but it will be neither a better or worse world without the oil cartel,” said Yastine.

It would mean “the world has many more choices in the energy sources uses,” he said. It also means the “global economy has to adjust to a more chaotic, less predictable energy environment.”

And “it’s quite possible that oil price swings, such as we’ve seen in the past few months, may be more common in an ‘OPEC-less’ future, as oil traders adjust to a stream of more random, less reliable bits of market information,” Yastine said.

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