As oil ministers from OPEC’s 12 member states prepare to fly into Vienna this week, they face their biggest challenge since the 2008 global economic meltdown – oversupply, weakening oil demand and an apparently permanent structural shift in the oil market.
There are three possible scenarios that could come out of the meeting tomorrow. The first is that the output ceiling is left unchanged; which would trigger a further price fall.
The ceiling is currently set at 30 million barrels per day.
Secondly, the member countries could agree to stick to the daily output target resolutely; providing some support to prices and/or moderating the decline.
Thirdly, they could cut production to 29 million barrels a day, taking a million barrels a day from the market, which would be the only way oil prices rise.
At the moment, OPEC members have been overproducing by 200,000 bpd, boosting total world production to 92.91 million barrels a day in addition to increasing supply from non-OPEC sources, according to data from the US Energy Information Administration.
In 2015, OPEC predicts that there will only be a need for about only 29.2 million barrels a day of OPEC crude on the market.
For now, there is no agreement within the group on what to do; the cartel seems internally divided. To cut output by a million barrels a day, Saudi Arabia will mainly take on the responsibility for this, and make the biggest contribution to the overall reductions – surrendering more market share to its rivals within the group such as Iran and Iraq, and outside the group such as the US.
While Saudi Arabia might be willing to maintain its production levels at current prices, other member countries would prefer Riyadh act otherwise.
Iran’s oil minister, Bijan Zanganeh, plans to talk to Saudi officials in Vienna to discuss the thorny issue of an increase in production from Iran. Iran’s production is expected to double, with foreign investment and expertise, after sanctions placed on it are lifted.
Zanganeh said countries in the southern Persian Gulf “are eager to maintain their market share, and a loss of market share is problematic for them,” according to the official Islamic Republic News Agency. OPEC members in the southern Gulf include Saudi Arabia, Kuwait, Qatar and the U.A.E.
Zanganeh has traveled to the United Arab Emirates, Qatar and Kuwait to push Iran’s agenda.
Apart from the issues with Iran, there are other countries like Venezuela and Nigeria, which depend on oil exports for most of their foreign revenues. These states all have ambitious plans to boost production and would benefit from cuts that restore oil prices back to $90 – $100 per barrel – a level required to maintain their economies.
Venezuela’s OPEC representative, Rafael Ramirez, has visited Algeria, Qatar, Iran and Russia to push this agenda.
Normally, Saudi Arabia acts as a swing producer in setting global oil output. Saudi Arabia is the only country in the world with spare production capacity. That is, when the prices are high, Riyadh can theoretically put more supply on the market to ease the price, and conversely when the prices become too low they can take oil off the market.
However, this time around, the fundamentals have changed and this is a different market.
OPEC’S share of the market has fallen from around 50 percent 20 years ago, to just under a third today, with production from outside the group expected to exceed 63 million bpd next year.
Brent crude prices have fallen by almost 30 percent since reaching their year-high of $115 per barrel in June. The fall in prices has been precipitated by the unexpected and sudden resurgence of the U.S. as a major producer.
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By 2020, Citigroup estimates that America will be pumping more than 14m barrels per day of oil and petroleum liquids, giving it the capacity to export almost 5m barrels per day, which will transform the energy market.
OPEC is clearly divided, and that would certainly be a factor in the meeting tomorrow.
At the moment, energy analysts are divided on whether cuts would be announced. For OPEC to go for the third option and cut output, it will most certainly come down to Saudi Arabia.
Yinka Abraham
