Oil prices underwent a wild ride in the lead up to the OPEC meeting in Vienna on December 4, and the markets gyrated as OPEC sent confusing signals on its intentions.
Early media reports suggested that OPEC had decided to raise its production ceiling from 30 million barrels per day (mb/d) to 31.5 mb/d. The reported move was seen as a nod to the inclusion of Indonesia into the group, bringing an additional 900,000 barrels per day of production. It also was seen as a decision to make a bit of room for Iran to bring some output back. Alternatively, raising the ceiling was interpreted as a recognition of reality, that is, that OPEC had been collectively exceeding its stated production target for quite some time.
Oil prices tanked by 3 percent on the news that OPEC would increase output, even though raising the production ceiling would not necessarily change supply dynamics. But the day grew more confusing when OPEC delayed its scheduled news conference and failed to confirm the news reports of a production increase.
At the press conference, OPEC’s President and Nigerian oil minister Emmanuel Ibe Kachikwu said that the group decided to leave production at their current levels. But in follow up questions from the press, he clarified that it would not be the 30 mb/d target that the group had agreed to up until now, but that OPEC agreed to leave actual production levels where they are – that is, somewhere near 31.3 mb/d, give or take a few hundred thousand barrels per day. In other words, the group is now officially not operating under a specific target – all bets are off. It is an unusual move not to operate under a specific targeted number, but OPEC said it would postpone a decision until the next meeting.
The decision is a recognition, on the one hand, that setting specific targets is pointless. All parties are going to do what is in their own interest. For nearly all members, that is producing as much oil as possible in order to make up lost revenue by moving higher volumes. OPEC is now just admitting as much, conceding that it will continue to produce well above the previous target.
The move to shed a production target is also a reflection of the fact that OPEC’s status is in flux. It is bringing Indonesia’s nearly 1 mb/d under its umbrella, but merely lifting the ceiling by 1 mb/d would be a tacit nod to a specific country production quota, something that the group got rid of several years ago. Similarly, Iran is about to bring 500,000 barrels per day of production back to the market, and likely more over the next half year or so, something that the OPEC President said was Iran’s “sovereign right” in his remarks to the press.
As such, OPEC apparently thought it would be useless to set a target right now, when countries are already exceeding that target, and in any event, the group’s collective production is expected to rise quite a bit over the next year.
OPEC left the door cracked on a meeting in January or February, after sanctions on Iran are lifted and the group can better assess market conditions. Similarly, OPEC’s President and Secretary-General issued some positive remarks on the possibility of coordinating with non-OPEC producers such as Russia. It is hard to imagine Russia, so devastated by low oil prices and little room to shoulder the pain of production cuts, would be willing to sign on to a cooperative arrangement. In fact, both Russia and Iran shot down the possibility of coordinated production cuts a few days ago when media rumors suggested that Saudi Arabia proposed a cut of 1 million barrels per day across OPEC and major non-OPEC producers.
Still, OPEC says that it could reconvene before its June meeting, perhaps hoping that it could make more headway with non-OPEC producers like Russia.
The confusing result from Vienna highlights a few key things. First, while countless overzealous obituaries have been written about OPEC’s vanishing influence, OPEC is indeed acknowledging that it cannot influence prices to the degree that it once could. On December 3, The Wall Street Journal revealed the details of an unpublished internal OPEC document that admitted as much. The document said that oil prices would not rise by much in the near-term even if it decided to cut production, due to the high levels of storage around the world.
Second, the result at least shows that OPEC is going to see its current strategy through to its logical conclusion, to the chagrin of most of its members. Venezuela is facing a financial and political crisis because of the collapse of crude prices but Saudi Arabia is unwilling to reverse course. Since OPEC operates by consensus, nothing will change. OPEC will continue to produce flat out and fight for market share.
That means oil prices will not rebound in the short run. As mentioned, storage levels around the world continue to rise. The EIA’s weekly numbers showed another increase in crude inventories by 1.2 million barrels last week, now just a whisker off the 80-year high hit earlier this year.
With little prospect of a price rebound, more pain is in store for oil companies around the world. High-cost producers in U.S. shale will continue to be under the crushing weigh of low prices, and U.S. oil production, while having proven resilient to date, will get rolled back.
By Nick Cunningham of Oilprice.com
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