Angola's decision to leave the Organization of the Petroleum Exporting Countries could open the way for Beijing to increase investment in the country's oil and other sectors, as part of a deepening of decades-old ties.

 Angola's Foreign Minister Tete Antonio, at the State Department in Washington.

Angola said on Thursday it was leaving OPEC, effective from Jan. 1, following a row with the producer group over the size of its output quota.

The decision also follows an agreement signed between China and Angola this month on enhanced cooperation.

"China stands out as a pivotal and proven partner," Angola's Foreign Minister Tete Antonio said during a visit to Beijing when the deal was signed.

Angola, for which oil constitutes 90% of exports, is seeking to diversify its economy, but it also needs revenue.

Antonio said Angola acknowledged the importance of technology, a skilled workforce and strategic partnerships that could help the country move on from oil, and called for more Chinese investment particularly in the country's coffee, batteries, and solar energy sectors.

Angola had been seeking a higher OPEC output quota. The group's quotas are designed to support global oil prices but can limit a producer's ability to attract oil investment in new capacity because they can cap earnings.

Freedom from OPEC output constraints could therefore allow China to increase its role in the oil sector, which has struggled from years of underinvestment.

"If they feel there is scope for them to find new investment from China to grow oil production, then perhaps that's the source of motivation to re-engage with the Chinese," Yvette Babb, portfolio manager at William Blair, said.

"Because while they need to diversify away from oil as a driver of growth, they do not have sufficient non-oil sources of revenue to sufficiently finance that diversification."

China has a vested interest in Angola's quest to overhaul its economy because Luanda owes Chinese creditors just under $21 billion, according to World Bank data.

POST-WAR RECONSTRUCTION

The debts go back years.

After Angola's civil war ended in 2002, the country took on Chinese loans to fund its reconstruction following 25 years of violence and sold hydrocarbons to the world's largest energy consumer. It was briefly China's biggest oil supplier in 2006.

Of late, China has received extra supplies from Russia as it has rerouted oil it supplied to Europe before Moscow's 2022 invasion of Ukraine ended relations with Western customers.

Angola's oil output has meanwhile shrunk for want to investment.

The net result has been a fall in Angola's oil shipments to China of nearly 30% between 2020 and 2022.

Environmental campaigners would favour Angola's departure from OPEC to herald a green transition.

"It makes sense for every resource-rich African country to diversify energy and revenue sources if they have the resources to do so, even if their pace might be slower than richer countries," Hannah Ryder, CEO of Development Reimagined, an African-owned development consultancy headquartered in Beijing.

But the this month's COP28 U.N. climate deal stopped short of calling for a phase out, or phase down of fossil fuel, and the economics of renewable energy can still be less enticing than the returns of oil and gas.

Chinese firms have invested just shy of $14 billion in Angola over the last decade, the bulk of which was in energy.

This year, Chinese investment into Angola consisted of $250 million from PowerChina, a state-owned civil engineering firm, into developing Angola's telecommunications infrastructure, according to data from the American Enterprise Institute think tank.

In 2021, the company made two separate investments of $160 million and $150 million into Angola's transport and healthcare sectors.

"We always hope to advance practical cooperation with Angola based on equality as well as mutual benefit," Wang Wenbin, a Chinese foreign ministry spokesperson, told a regular news conference in Beijing on Friday.

In its latest pitch to deepen its ties - and economic influence - in Africa, China will offer six countries, including Angola, tariff-free access to its massive consumer market on 98% of the goods that it imports, starting on Dec. 25, Christmas Day.

Angola departure a blow for OPEC+ as cartel tensions rise.

The expansion of OPEC has proved to be a double-edged sword for the cartel as it means decision-making has become more difficult, according to Swissquote analyst Ipek Ozkardeskaya.

Angola's departure from OPEC exposes the tensions with the oil cartel as it seeks to cut output to maintain prices just as the United States ramps up production.

Despite slashing oil production for months on end and announcing new cuts in late November, the Organization of the Petroleum Exporting Countries and its ten allies have struggled to boost flagging prices.

Moreover, the wider OPEC+ group faces pressure on multiple fronts, as rising US crude production, a looming transition away from fossil fuels, and discord within its ranks have added to the challenges.

Prices are sitting at their lowest level in nearly six months despite the cartel's announcement in November to further cut output.

They jumped briefly as cargo shippers and oil firms said they will avoid using the Red Sea and Suez Canal because of drone and missile attacks by Huthi rebels. But they still couldn't break above $80 a barrel.

Nevertheless, crude prices remain above the average of the past five years.

In an effort to prop up prices, the OPEC+ alliance has implemented supply cuts of more than five million barrels per day (bpd) since the end of 2022.

After nearly striking $100 in September, the alliance's strategy has since fallen short of reversing the price slide.

While Saudi Arabia blamed speculators for the drop, rather than the weak demand outlook as the world economy struggles, analysts say the cartel's lack of unity has fuelled scepticism about their latest announced cuts.

The decision by Angola will likely further fuel scepticism.

- Frictions laid bare -

"If the supply cuts went broadly unheard it is because the latest discussions showed frictions at the heart of the group," Swissquote analyst Ipek Ozkardeskaya told AFP.

Not only Angola, but also Nigeria expressed dissatisfaction with their production quotas at the November ministerial meeting, which had to be postponed for several days because of disagreements.

Furthermore, the OPEC+ alliance was unable to agree on a group-wide production cut that all 23 members would have supported.

Instead, heavyweights Saudi Arabia and Russia only managed to garner support from six other members in a bid to voluntarily reduce output.

SEB bank energy analyst Bjarne Schieldrop downplayed the impact of the departure of Angola, a smaller producer at 1.1 million bpd.

"Everyone knows that West African countries are in a slightly different league than Middle East countries," he said.

This is due not only to the volume of their production, but their higher production costs, making them more sensible to output cuts.

Moreover, Angola is far from the first small country to quit the cartel. Indonesia left in 2009, Qatar in 2019 and Ecuador in 2020.

"It would be really different if it was one of the key countries in the Middle East, like Kuwait, Iraq…," said Schieldrop.

- 'Double-edged sword' -

Founded in 1960, the 13-member OPEC cartel in 2016 partnered up with 10 other producers to form OPEC+ to gain more clout.

But the group's enlargement has proven to be "a double-edged sword", noted Ozkardeskaya, with decision-making becoming more difficult.

The Vienna-based group drew international attention in 1973, when it imposed an oil embargo against Israel's allies in the midst of the Yom Kippur War, triggering the first oil crisis.

Within just a few months, prices quadrupled, highlighting the cartel's dominance.

Faced with rising competitors in the 1980s, it introduced its famous quota system that enabled it to exert more control over the market.

This strategy meant the group fared relatively well during the 2008 financial crisis and the price shock in the wake of the Covid pandemic, despite increased internal tensions.

As a result of the supply cuts and amid various political crises in Libya and Venezuela, the OPEC+ share of the oil market has fallen to 51 percent -- the lowest since its creation -- the International Energy Agency (IEA) said in its latest report.

Meanwhile, crude production in the United States, the world's leading producer, has risen above 20 million bpd, while Brazilian and Guyanese output has also soared.

"The shift in global oil supply from key producers in the Middle East to the United States and other Atlantic Basin countries... (is) profoundly impacting global oil trade," the IEA said.

- Green transition -

In recent years, OPEC+ has been confronted with its own demise as an increasing number of states have called for a transition away from fossil fuels owing to climate change.

OPEC  has an "interest (in) delaying the green transition as much as possible, said Ozkardeskaya.

At the COP28 summit in Dubai this month, OPEC Secretary-General Haitham Al Ghais urged OPEC+ members in a heavily criticised letter to "proactively reject" any language that "targets" fossil fuels rather than emissions.

According to analysts, it is imperative for Riyadh to sustain the inflow of government revenues derived from oil.

They are "essential to finance Saudi Arabia's extensive and multi-year economic diversification programme, including ambitious giga projects", said Stephen Innes of SPI Asset Management.

Riyadh has been working on developing other sources of revenue, but "the transition doesn't happen overnight", UBS analyst Giovanni Staunovo added.

Oil Edges Lower on US Output Gains, Angola’s Departure From OPEC

Oil edged lower as traders weigh surging US production against disruption in the OPEC cartel and the threat of ship attacks in the Red Sea.

West Texas Intermediate slipped to settle below $74 a barrel after a three-day advance, with sentiment worsening after Angola announced its exit from the Organization of Petroleum Exporting Countries.

Angola’s departure will shrink OPEC’s membership to 12 nations. The government in Luanda had rejected a reduced output limit that leaders of the group had imposed on it in a reflection of the country’s dwindling production capacity. Traders continue to see signs that supply remains ample as US crude output hit a record of 13.3 million barrels a day last week, according to government data.

Meanwhile, the Iran-backed Houthi militant group warned it would retaliate if the US carries out attacks on its bases in Yemen.

Crude rallied earlier this week as the escalation of the Red Sea attacks prompted shippers to divert vessels away from the major energy chokepoint. Oil is still set for the first annual decline since 2020, as booming production from the US, Guyana and Brazil offsets output cuts by Saudi Arabia and the OPEC+ cartel.

Read More: China’s Oil Demand Growth to Cool in 2024 as Recovery Fades

Red Sea

Almost 12% of global trade goes through the Red Sea, and more than 100 container ships are currently taking the long route around Africa due to the fear of attacks. While Washington is mulling military action against the Houthis, it would prefer a diplomatic solution, and is working with Western and Arab allies to bolster a maritime protection force.

“Until the naval coalition” eventually “shows its teeth, the Red Sea situation will continue to have an outsize influence on oil players’ thinking,” Tamas Varga, an analyst at broker PVM Oil Associates Ltd.

The world’s dominant oil cartel is losing power.

With insights from CNBC, the Financial Times, and the International Energy Agency

NEWS

Angola will leave oil cartel OPEC, following a dispute over oil production quotas. The nation’s oil output has been sinking in recent years, and OPEC requested it cut its exports to 1.1 million barrels per day, below its current production levels.

“As a country, when we participate, it is to contribute, expecting results that align with our interests,” Mineral Resources Minister Diamantino Azevedo said. “When this doesn’t occur, we become redundant, and it no longer makes sense for us to remain in the organization.”

Angola is the latest member to quit the group in recent years, and its exit raises concerns over OPEC’s infighting and the cartel’s cohesion, Bloomberg reported, as its influence over the global oil trade continues to wane.

SIGNALS

Non-OPEC nations are filling production gaps

OPEC seeks to control oil prices by systematically cutting production. But in recent months, that method hasn’t worked. Non-OPEC nations, including the U.S. Brazil, and Guyana, are producing more oil than ever, padding out the gaps left by the oil cartel’s members. Heading into 2024, analysts believe the oil market could actually be oversupplied, especially if U.S. oil production once again exceeds estimates. “There’s a lot of fear that no matter what OPEC does, no matter how much they cut, there are non-OPEC producers that are just going to fill the hole they keep digging,” Rebecca Babin, a senior equity trader with CIBC Private Wealth, told CNBC.

OPEC’s influence on oil prices is falling

Despite the war in the Middle East and shipping pressures in the Red Sea, oil and gas prices have remained stable, suggesting that OPEC “simply is not the force it once was,” Financial Times’ economics commentator Chris Giles noted. He cautions that while the energy crisis is not over, the world is rapidly moving away from fossil fuels, as reflected by the COP28 agreement to phase out oil and gas production. “Peak oil is within sight and there is not much Opec+ can do about it,” Giles wrote.

World is at the ‘beginning of the end’ of fossil fuel era

The International Energy Agency believes that oil demand will peak before 2030 as the world moves toward renewable energy and electric cars. “The transition to clean energy is happening worldwide and it’s unstoppable,” IEA Executive Director Fatih Birol said in October. It’s likely that OPEC will keep a tight grip on the oil market until the end of the decade, but demand is expected to shrink, ultimately impacting the cartel’s influence. That is “because consumers have an increasing range of mature clean energy options that become more attractive,” the IEA said in its annual World Energy Outlook.