Opec ministers opt for status quo as oil prices slide
Opec oil ministers meeting in Vienna yesterday opted to hold production steady, a recognition that there is little they can do to hold back market forces that have pushed prices down to their lowest levels in more than four years.
Oil prices fell hard on the news. The world benchmark North Sea Brent crude — which peaked at US$115 a barrel in mid-June — was down 4.1 per cent yesterday at $74.51 a barrel in late afternoon trading.
The result of the meeting underlined a deep rift within the organisation, whereby the Gulf producers — Saudi Arabia, UAE, Kuwait and Qatar — whose economies are in a better position to withstand a period of relatively lower oil prices, are more interested in defending their share of the world oil market even if it means lower prices, while those countries already suffering severe budget shortfalls — most notably Venezuela, Iran and Nigeria — have been pushing for the stronger members to cut output to shore up prices.
The UAE’s Minister of Energy, Suhail Al Mazrouei, echoed other ministers in saying that it was not Opec producers who were primarily responsible for the world’s oil glut, referring particularly to surging North American production.
The decision to hold the output target steady reflects not only external realities but internal Opec politics too, says Amrita Sen, chief oil analyst at Energy Aspects.
“To make a credible cut, Opec would have had to re-impose individual country quota restrictions but that would have been hugely contentious. So, for Saudi Arabia this is about setting a precedent, as a cut today would simply have meant the need to cut again in a year’s time, as US producers would benefit from higher prices and continue raising production.”
Oil prices have been declining since peaking in June and fell again sharply in the last few days. In Dubai yesterday, the Middle East/Asia benchmark Oman crude futures contract for January delivery closed down $2.54 at US$74.21.
Earlier in November, the International Energy Agency, a Paris-based energy watchdog for the major consuming countries, said the world oil market had entered a new phase because the biggest consumers — the United States, Europe and Japan — were consuming less energy even when their economies were growing, while demand growth in China was slowing too as its economic development progressed.
Meanwhile, oil production from North America — especially from unconventional sources, including so-called shale oil — has surged over the last few years, helped by relatively high oil prices. That has pushed the need for imported oil by the US to its lowest level in more than four decades and meant tougher competition for oil producers to find buyers.
“It is increasingly clear that we have begun a new chapter in the history of the oil markets,” the IEA concluded. “Economic development no longer spurs oil demand growth as it once did.”
Kuwait’s oil minister, Ali Saleh Al Omair, recognised this new reality when he told Bloomberg Television on the sidelines of the Vienna meeting: “We have to live either with $80 or $60 or with $100 (a barrel oil prices), so I think we have to keep the market itself to accommodate the price the producers and the consumers are happy with.”
Opec’s decision to hold steady means that the Saudi view prevailed: that a period of lower oil prices will forestall investment in higher-cost production — particularly in North America — and lead to longer-term price stability at higher prices.
“I don’t expect too much economic pain for Gulf producers like the UAE because of large reserves that will continue to fund large social projects,” said Amir Handjani, a Dubai-based energy analyst and managing director at PT Capital. “If you recall, in 2009 oil prices crashed and the UAE made it through just fine. Obviously if the benchmark goes below $60 there will be some belt tightening but I imagine it will be short lived because at that point US shale production becomes too costly and not viable and once North American production scales back, the market will stabilise and oil prices will recover. “
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Updated: November 27, 2014 04:00 AM