OPEC likely to keep out­put tar­get on hold

The China Post - - WORLD BUSINESS - BY GE­ORGE JAHN

The price of crude re­mains too low for most OPEC mem­ber na­tions. But with the 12-na­tion car­tel’s con­trol of sup­ply and de­mand slip­ping, its oil min­is­ters may have lit­tle choice this week but to sit back and do noth­ing.

Min­is­ters of the Or­ga­ni­za­tion of the Petroleum Ex­port­ing Coun­tries meet in Vi­enna Fri­day against a back­drop of oil prices that are off the lows of Jan­uary — but still nearly 50 per­cent less than peaks of US$115 a bar­rel a year ago for some grades. Past OPEC so­lu­tions were sim­ple — cut pro­duc­tion and drive prices up­ward.

But the days of near to­tal OPEC dom­i­nance are over. The or­ga­ni­za­tion still ac­counts for about 40 per­cent of world sup­ply, but oth­ers now stand ready to chip away at its share. With prices for bench­mark U.S. crude now at around US$60 a bar­rel, any decline in OPEC out­put will be quickly filled by out­side play­ers in­clud­ing U.S shale oil pro­duc­ers, who have cut back as prices have fallen but are ready to ramp up their share should they rise.

Faced with that op­tion, OPEC will likely opt to keep its tar­get at 30 mil­lion bar­rels a day.

“A sur­prise cut in the out­put tar­get would send the price of oil higher yet and thus in­crease the ap­peal of U.S. shale oil pro­duc­tion again,” said a Kom­merzbank re­search note fore­cast­ing a rollover of the present out­put tar­get. En­ergy As­pects of Lon­don says “an OPEC pol­icy of no change is the right one.”

They Can Af­ford to Do So

OPEC pow­er­house Saudi Ara­bia and their Gulf al­lies are best set to con­tinue all-out pro­duc­ing — even though they, like oth­ers, are sell­ing at a loss. But they can af­ford to do so. The Saudi sovereign wealth fund stands at over US$700 bil­lion, the cof­fers of the other Gulf na­tions are also well stocked, and Saudi Oil Min­is­ter Ali Naimi is sig­nal­ing that his coun­try will con­tinue pump­ing over 10 mil­lion bar­rels a day, about a third of to­tal OPEC out­put.

The mar­ket is mov­ing “in the right di­rec­tion,” he said on ar­rival in Vi­enna.

The Saudis, who ef­fec­tively set OPEC pol­icy, were the prime driv­ers in the de­ci­sion in Novem­ber to keep the 30 mil­lion bar­rel-a day tar­get, the sev­enth time in three years that the group opted for the sta­tus quo. And over­pro­duc­tion con­tin­ues — ahead of Fri­day’s meet­ing, the group is more than 1 mil­lion bar­rels a day over that bench­mark.

But the less well-off among OPEC states are hurt­ing.

Among them is Al­ge­ria, which has long de­pended on high oil and gas prices to op­er­ate an ex­ten­sive wel­fare state and has been harshly hit by the shale boom, which gen­er­ates the same light blend that it sells.

For Venezuela, where crude ac­counts for 95 per­cent of all ex­ports, the price slump has hugely ex­ac­er­bated that coun­try’s eco­nomic hard­ship — the coun­try needs prices above US$120 a bar­rel just to break even. And Nige­ria was forced to trim its 2015 bud­get by 12 per­cent be­cause of low crude prices. Oil makes up 75 per­cent of its ex­ports.

Still even OPEC’s poor coun­tries know that past OPEC reme­dies of cut­ting pro­duc­tion to drive up prices will no longer work. They have been over­taken by the rise of oil and gas power Rus­sia, and more re­cently U.S. shale, which alone has put mil­lions of ex­tra bar­rels a day on the mar­ket at a time of rel­a­tively slack world de­mand.

And they could not force through an out­put cut, even if pre­pared to earn even less by re­duc­ing pro­duc­tion now in hope of driv­ing up prices in the longer run.

“Po­ten­tial dis­senters re­al­ize that a pol­icy re­ver­sal is not in the cards at this time, given that the four Gulf Arab mem­bers sup­port­ing the de­fense of mar­ket share — Saudi Ara­bia, Kuwait, the United Arab Emi­rates, and Qatar — ac­count for more than half of OPEC out­put,” says Bhushan Bahree of IHS Oil En­ergy.

In fact more — not less — oil could well hit the mar­ket soon.

Iran was sec­ond only to the Saudis in terms of pro­duc­tion be­fore its mar­kets were crip­pled by sanc­tions im­posed over its nu­clear pro­gram. If it strikes a nu­clear deal by the end of the month as planned in ex­change for sanc­tions re­lief, it aims to ramp up its present pro­duc­tion of about 1 mil­lion bar­rels a day as quickly as it can.

Such plans spell more ten­sion within OPEC, fur­ther dent­ing its self-pro­claimed im­age of unity. Bit­ter re­gional ri­vals with Iran, the Saudis are un­likely to cut back on their pro­duc­tion to make way for more oil from Tehran. And other mem­bers are also un­likely to re­duce out­put.

“The big­gest is­sue the mem­bers may have to deal with is the re­turn of Ira­nian oil,” says an­a­lyst Phil Flynn.

AP

Iraq’s Min­is­ter of Oil Adil Abd Al-Mahdi speaks to jour­nal­ists dur­ing a sem­i­nar of the Or­ga­ni­za­tion of the Petroleum Ex­port­ing Coun­tries, OPEC, at the Hof­burg palace, in Vi­enna, Aus­tria, Wed­nes­day, June 3.

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