OPEC Maintains Market Share
Oil ministers from 12 members of the Organization of the Petroleum Exporting Countries (OPEC) agreed during their 166th meeting in Vienna on November 27 to keep the oil producer group’s production ceiling unchanged at 30 mb/d for the sixth consecutive year.
Brent oil prices have plunged nearly $45 since June this year mainly due to market overglut. OPEC, as an organization which has traditionally shored up prices, was expected to agree on production cut in order to increase prices which have been fluctuating. But OPEC member states argued that the current market oversupply is not due to their production and they did not accept to reduce their market share. In their most important meeting in recent years, OPEC members preferred preservation of their market share to high oil prices.
Immediately after OPEC announced this decision, oil prices slumped $5, marking the highest weekly loss in three years. US crude was traded at $68, down from $70 in recent weeks. Brent fell below $72. According to the OPEC website, its basket price fell $3 to $70 the day after its ministerial meeting.
The market oversupply coincides with falling demand. Two big economies – Europe and Japan – are in recession and China, the second largest consumer of oil in the world, is experiencing sluggish economy.
The weaker demand has been more influential than the oversupply on the price decline. OPEC countries are convinced that they would not lose their market and the current prices will slow down shale oil production; therefore, the prices would go up in the future. Of course OPEC was not unanimous on maintaining the production ceiling because member states have different economic conditions and all of them have not suffered equally from oil price slump. Some countries tried to convince the organization to cut its production in order to boost prices. For instance, Venezuelan Foreign Affairs Minister Rafael Ramirez had suggested a 2mb/d cut in the OPEC production. He had made the proposal on behalf of Venezuela and Ecuador. After OPEC decided to keep the production ceiling unchanged, Ramirez walked out.
Venezuela is under tough economic pressure due to generous subsidies it grants to commodities. It needs at least to sell oil at $160 in order to be able to realize its economic plans. Ecuador is the smallest OPEC member state, but it needs high oil prices.
The position taken by Iran’s Petroleum Minister Bijan Namdar Zangeneh is significant. His performance could be assessed as positive. Following his consultations with oil-rich countries in recent months, Zangeneh had already predicted the outcome of the OPEC ministerial meeting. Upon his arrival in Vienna for the meeting, Zangeneh said OPEC member states should stick to any decision adopted by the oil producer group.
After the meeting, Zangeneh said the outcome “was not what we desired”, adding: “I’m not sad with the OPEC decision.”
The Iranian minister said OPEC member states have to exchange views further in a bid to bring their views closer together.
Iran is currently under sanctions and it is impossible for the country to increase its oil exports to gain more revenues. Moreover, oil price falls are squeezing Iran’s hard currency revenues.
By saying that Iran respects OPEC’s decision, Zangeneh sought to avoid any discrepancy between member states to avoid a sharp reduction in the prices. The Iranian minister did not let others think that Iran is a weak OPEC member.
“I don’t think that decision would be in the interest of all OPEC member states, because some members were opposed to this decision, but it was necessary for OPEC unity and solidarity. We decided not to act against this decision,” he said.
“I can’t say that nobody disagreed with this decision, but what I can say is that most countries tried to make decision differently,” said Zangeneh.
He said that the US shale oil production poses a big challenge for OPEC as shale oil is currently competing with conventional oil; therefore, OPEC share of the market is falling.
“We are not looking for war in OPEC. OPEC members have to exercise unity vis-à-vis oil oversupply and non-OPEC producers should contribute to any decision for cutting production,” he said.
Zangeneh said analysts forecast oil oversupply to keep rising in the coming years.
Meeting with Oil Giants
On the sidelines of OPEC ministerial meeting, Zangeneh met with representatives of a number of Western oil companies. He said his meetings were aimed at preparing the ground for the return of these companies to Iran once sanctions have been lifted.
Zangeneh said the recent decision by Iran and six world powers to extend nuclear talks again did not mean that Western oil companies would no longer be able to operate projects in Iran.
Nigeria’s oil minister was elected the rotating president of OPEC for one year, starting in January. OPEC Secretary General Abdalla Salem el-Badri saw his term extended for another six months.
An important point with OPEC is that Saudi Arabia is an influential member state, which produces more than 9 mb/d of oil. Saudi Arabia and its allies who were behind the OPEC decision are supplying 15 mb/d of oil, half the OPEC ceiling for the market. Definitely, Saudi Arabia and three other Arab members of OPEC wield more clout than other eight members with OPEC.
Iran is seeking to wean its economy off oil. The administration of President Hassan Rouhani has taken effective steps for breaking the dependence of Iran’s economy on oil. In recent years, Iran’s economy has become more and more dependent on oil and the ongoing price fall would be of great help in weaning economy off oil revenues.
OPEC members look to have taken the best decision they could although they could act in a better way, too. They preferred higher oil prices in the short-term to safeguarding their market against shale oil and non-OPEC producers in the long-term.
Despite what some analyses say, non-OPEC rivals are not so weak. Russia alone is holding 14% of the world’s total oil reserves and the US is making up 14% of oil production in the world. Russia, the US and Mexico – all three of them non-OPEC producers – are producing more than 40% of the world oil. The trio has said that they would not suffer any loss even though prices fall to $60 a barrel.
Therefore, had OPEC cut its production ceiling it would have emerged loser. Meanwhile, 500,000 b/d production cut would not affect the market because OPEC and non-OPEC producers are currently oversupplying 1.5 mb/d to 2 mb/d of oil.
Should OPEC member states comply with the decision adopted by the body it would be a great success because it would help stabilize oil market as shale oil producers are targeting OPEC’s share of the market.