OPEC will face many challenges in Algiers

Sunday 25/09/2016

Beirut - The Organisation of the Pe­troleum Exporting Coun­tries (OPEC) and non- OPEC oil producers are to meet at the International Energy Forum (IEF) in Algiers. OPEC plans an informal ministerial council on the sidelines of the IEF.

Oil markets are watching the OPEC meeting carefully following the International Energy Agency’s (IEA) revision of figures regarding an expected price move towards $50-$55 per barrel instead of the current $45-$50 per barrel. Earlier projections had prices rising in ear­ly 2017 with a price band of $55-$60 per barrel coming perhaps in the second half of next year.

The IEA Oil Market Report for September forecasts, for 2016, a gain of 1.3 million barrels per day (bpd), a downgrade of 100,000 bpd on its previous forecast, due to a more pronounced third-quarter economic slowdown. Demand is predicted to ease to 1.2 million bpd in 2017 because of uncertain global economic conditions.

OPEC also does not see world economic growth rising significant­ly higher to increase demand. Ac­cording to the latest OPEC Monthly Market Review for September: “The trend of the past year’s moderate global growth is likely to continue in both 2016 and 2017. World [gross domestic product] GDP growth now is forecast at 2.9% for 2016 and 3.1% for 2017.

“After particularly low growth in the first half in the United States and Japan, along with the contin­ued contraction in Russia and Bra­zil, these economies are expected to pick up in the remainder of the year and to show higher growth in the coming year. The eurozone, the United Kingdom, China and, to some extent, India are forecast to show lower growth.”

OPEC’s challenge transcends that of demand slowdown. What the organisation has to observe closely is the record-high crude oil and pe­troleum products stocks that have exceeded 3 billion barrels globally. As long as stocks remain at record levels, they will exert downward pressure on prices.

A third challenge for OPEC is how to cap its member states’ produc­tion. Since the collapse of oil prices in mid-2014, Saudi Arabia, Iran and Iraq have each increased produc­tion approximately 1 million bpd. There are different reasons for the increases. First, competition over market share. Second, an attempt to restore production to pre-sanc­tions level, as is the case of Iran. Third, commitment to production contractual agreements with oper­ating international oil firms.

Finally, OPEC has to deal with discord among its members. Ear­lier this year, Iran refused to cap its production until it reaches the pre-sanctions production level of 4 mil­lion bpd. Now, Iran is demanding a 15% share of OPEC production, as well as being excluded from any agreement in Algiers to cap produc­tion.

Non-OPEC member Russia, which had expressed interest in cooperating with OPEC to stabilise markets as demonstrated by the recently signed Russian-Saudi ac­cord, is not ready to cooperate with OPEC, unless the oil-producing or­ganisation adopts a unified produc­tion policy.

OPEC’s strength has emanated from its readiness to reduce pro­duction when prices are falling. This policy has changed during the current price crisis. OPEC states are concerned that, if they slash pro­duction, they would be replaced either by Russian or US crude oil.

Russia produced about 10.8 mil­lion bpd of crude oil in the second quarter of 2016. US shale oil pro­duction peaked at 4.9 million bpd in 2014-15, providing around 50% of US production. Moscow can in­fluence its oil firms. The US shale oil industry is made up of scores of small independent oil firms with credit facilities made available to them by US banks and financial in­stitutions.

The US shale oil industry has proved it can increase production to high levels and in a relatively short period of time. The shale in­dustry, with a high cost of produc­tion of approximately $55-$80 per barrel, needs high prices to sustain high production levels. The shale oil industry will slow down as it loses the credit facilities if prices drop to less than $50 per barrel.

This means that OPEC needs to adopt policies aimed at a differ­ent price target than what was achieved earlier ($100 per barrel) or risk strong competition from the United States and Russia.

It is expected that OPEC minis­ters will discuss more immediate supply-demand issues in Algiers. It is not expected that OPEC will agree unanimously to cap produc­tion. It is not expected that Russia or other major non-OPEC produc­ers will agree to cap production, as long as there is no unanimous OPEC decision.

Global oil supply needs to fall by about one-tenth if it is to match consumption, Venezuelan Oil Min­ister Eulogio del Pino said in an interview with state-owned oil company PDVSA’s internal TV sta­tion. “Global oil production is at 94 million barrels per day, of which we need to go down 9 million barrels per day to sustain the level of con­sumption,” del Pino said.