Friday's OPEC summit seems to have failed to come up to our expectations. The thing is that the trading community had expected an oil production cut or at least no change in these terms. However, I dare assume that none of you can say they were betting on another production hike by OPEC. Apparently, a production cut may have stabilized the situation in the global market of crude oil. Even if there had been no change made, the prices would have felt less downward pressure. Still, despite the increasing oversupply of crude oil in the global market, OPEC is not going to cut the oil production. On the contrary, they cartel is reported to have raised the bar from 30 million all the way up to 31.5 million barrels a day. At least this is what Bloomberg reports. This triggered a slowdown across the oil market and outside of it. Later on, the Iranian Minister of Oil disproved the rumor by saying that OPEC that production quotas hadn’t been added to the agenda at all.
Anyway, OPEC members seem to be at odds over the matter. The major source of opposition is coming from those OPEC members who have difficulty sustaining their budgets heavily dependent on oil exports. This leads us to believe that OPEC is going to postpone the decision till mid 2016, when another OPEC summit is going to take place.
According to the Secretary General of OPEC, it is difficult to consider any production quotas at this point since it is unclear what is going to happen when Iran is going back to the market with its crude oil. With that said, the best option for OPEC is to wait for the next summit to make the decision. Until then, uncertainty is likely to keep ruling the market. For now, OPEC is going to stick to the existing level of oil production. Even though they talk about 30 million barrels a day in reality these quotas are ignored. Some experts say that the actual production level within the scope of OPEC is somewhere between 31 and 32 million barrels a day.
Meanwhile, OPEC urges non-OPEC members to consider production cuts together. Apparently, OPEC doesn’t want to lose its market share by cutting its oil production while other oil-exporting nations are pumping oil at the same pace.
For now, we can conclude that all the oil exporters are suffering from lost profits. Still, some of the nations are suffering more than others. For instance, in order for Venezuela to get a balanced budget, it needs to export oil at $160/b. This year’s budget was based on $60/b, which means the deficit is widening. Iraq’s budget for 2016 counts on $45/b while last week’s OPEC basket cost $37,9/b, 11-year low. The same holds true with most other exporters of crude oil. And while they feel like cutting oil production in order to stop the prices from plunging, they are afraid to lose their market share. This is the very dilemma the have been trying to solve since mid 2014.
Experts say that it is too premature to undermine OPEC’s importance in the international arena. It accounts for 40% of the global oil production. At the same time, we cannot but pay attention to the internal confrontation going on between Saudi Arabia, Qatar and minor OPEC members demanding production cuts to stabilize the market. The thing is that Saudi Arabia and Qatar can still survive low oil prices with a pretty thick safety cushion – those billions of dollars earned during times of high oil prices. However, such OPEC members as Venezuela , Ecuador and Nigeria are in desperate need for much higher oil prices to sustain their economies. And the only way to do it is to temporarily cut the production through cutting the quotas first. Anyway, the cartel is not going to cancel the quotas. Yet, these quotas have been ignored and are going to be ignored in the future…
