VIENNA – Cheap oil that could get even cheaper: That’s the challenge OPEC ministers face as they try to cut their losses at a time when supply is outstripping demand.
But their hands appear tied.
Ahead of their meeting Friday, there is recognition that the 12-member Organization of the Petroleum Exporting Countries will be unable to nudge up prices, at least in the short term.
Non-OPEC countries like Russia and the U.S. continue to challenge OPEC for customers. And within the cartel, Iran and Iraq want to start pumping more, even though regional rival Saudi Arabia appears unwilling to play along by reducing its own output.
The Saudis and other OPEC states are looking to maintain their market share at a time when low prices are already cutting into their revenues.
The upshot is the meeting will likely decide to maintain the official OPEC level of 30 million barrels a day, urge members to cut back on overproduction and hope for better times next year. That means oil could get even cheaper.
Iran’s comeback is tied to the looming end of sanctions imposed over its nuclear program. Embargoes on Iranian oil are to be lifted over the next few months once a nuclear deal it signed with six world powers goes into force.
Senior oil official Amir Hossein Zamaninia said last week Iran hopes to bring an extra 500,000 barrels on the market by early next year. He said he hopes the extra output will be accommodated within OPEC’s formal ceiling of 30 million barrels a day.
Arriving for Friday’s meeting, Iranian oil minister Bijan Namdar Zanganeh said Iran is ready to discuss a ceiling for its production — but only after his country makes a “full return to the market.”
But Iran’s hopes of a cutback from others for now are unlikely to be fulfilled. Ahead of Friday’s meeting, OPEC already was churning out well over than 31 million barrels a day and OPEC members are likely to continue producing more than their share as they push to compensate for low prices by increasing output.
Some of those extra barrels will likely come from Iraq. The world’s fastest-growing source of crude this year, it was pumping more than 4 million barrels a day last month and was responsible for last month’s biggest monthly rise in output among all OPEC countries.
These trends mean that the pressure is on Saudi Arabia, which accounts for about a third of OPEC’s output, to cut back.
Saudi opposition to a cut in OPEC output a year ago was calculated to put higher-cost outside competitors — such as U.S. shale oil producers — out of business, in the hope that would eventually lead to a drop in supply and a rebound in prices. That strategy clearly hasn’t worked, with benchmark U.S. crude’s value falling by more than 40 per cent over the past year and now hovering around the $40 mark per barrel.
Cushioned by past profits on oil, the Saudis can hold out, even if production costs exceed sale revenues. Not so much some others.
“Prices have gone down too much,” said Vice Prime Minister Abdourhman Ataher Al-Ahirish of strife-torn Libya, where GDP is expected to shrink more than 6 per cent this year. “This has its effect on our economy.”
But the Saudis appear in no mood to act unilaterally.
Analysts at Energy Aspects say the kingdom is “only likely to cut once it can influence the market again” — a scenario that is unlikely before the second half of next year considering present plentiful supply.
That seems to leave only an increase of Middle East turmoil as a potential price driver, for now.
Ed Cowart, of Eagle Asset Management, points out that uncertainty over global supply was the “justification for $100-per-barrel oil a couple of years ago.”
Noting there are at least three shooting wars within about 1,000 miles (1,600 kilometres) of about 30 per cent of the world’s oil production in the Middle East, he writes: “Compared to today, a couple of years ago seems like a pretty calm time.”
Jelena Vicic contributed from Vienna.