Only two weeks remain until the fated meeting between the OPEC countries and their counterparts from outside the organization, scheduled to take place in the Qatari capital of Doha on the coast of the Persian Gulf. The meeting could very well determine the direction oil futures will take, at least until the next OPEC meeting in Vienna on June 2.
Crude oil exporting countries around the world enjoyed significant profits since 2010 as prices circled around the $100/barrel mark, until ultimately falling victims to their own record output volumes as supply began to exceed global oil demand amid a slowing economic growth. Over a period of nineteen months following June of 2014 crude prices fell 70 percent to their 12-year lows in January 2016 for the European Brent benchmark and in February for West Texas Intermediate.
As countries whose economies have depended largely on oil exports are feeling the urgent need to address various economic and social issues, brought up by the decline in the value of their most prized commodity, common sense dictates that action must be taken to cut production in an effort to stabilize oil prices. As UBS Senior FX Strategist Geoffrey Yu said to the Bloomberg Surveillance anchor Tom Keene on April 1, the price for a single barrel should be within the $50-80 range in a normally functioning market.
However, consensus has been hard to find with major producers having their own agenda, some bluntly stating why they want to keep prices low. An agreement to cap production at near-record highs of January 2016, signed on February 16 between Saudi Arabia, Russia, Qatar and Venezuela and later backed by Nigeria, helped to divert oil prices from the negative trajectory, but the rally that pushed crude value some 50 percent higher is running out of breath in the wake of more recent developments. Related: OPEC’s No.2 Producer Rudderless As Oil Minister Resigns
As of April 1, twelve countries have confirmed their participation in the conference in Doha. They are Saudi Arabia, Russia, Kuwait, Nigeria, UAE, Indonesia, Venezuela, Bahrain, Algeria, Oman, Ecuador, and the host Qatar.
Let’s take a closer look at some of these participants and try to better understand their incentives and what could be expected from them.
In its recent study, RBC Capital Markets underlined five economies that are headed for imminent disaster unless oil prices don’t take a turn for the better. The holder of the world’s largest proven oil reserves is one of these economies.
The state of the Venezuelan economy can only be approximated as the country stopped releasing accurate data in late-2014. Amid the oil crisis, the Central Bank of Venezuela confirmed inflation at 180 percent, although economists estimated a figure 275 percent, and it is expected to skyrocket to as much 720 percent in 2016.
The Venezuelan government is quick to jump on any attempt at raising oil prices, but even if they were to add 100 percent to what oil is currently worth, a much higher price would still be needed if the country were to escape an economic meltdown.
This non-OPEC country has been mostly relying on its oil and natural gas exports since it restructured its economy after the collapse of the Soviet Union. Supplying energy resources to major economies in both Europe and Asia, the “sleeping giant” was hit not only by shrinking oil prices but also gas prices, which were dragged down along with oil. Additionally, the economic sanctions, introduced by Western nations in response to Russian aggression and seizing territory in Ukraine, also detrimentally impacted Russia’s economy. The ruble contracted over 100 percent against the USD to become one of Europe’s most unstable currencies of the past two years. Related:Oil Bust Takes Its Toll On Latin-American Oil Output
However, European sanctions sped up Russia’s exports reorganization, pushing it closer to China. In 2015 Russia’s trade with China contributed to 12.1 percent of the former’s overall foreign trade activity, an increase from 2014’s 11.3 percent.
While China will be seeking to increase volumes of its oil imports in the coming years to become the world’s largest crude consumer, according to Fuliang Zhong, vice-president of the Chinese trading company Unipec, an increase in oil prices will be welcomed by Russian producers, looking to return missed profits.
For Iran it couldn’t be a worse time for an oil price drop than now. After sanctions against it were introduced in 2012 due to the country’s growing nuclear program that could threaten regional security, this OPEC member slashed its production by a third.
With sanctions removed this January, Iran is in no mood to talk about capping oil output, until its own output is brought back to pre-sanction levels. A source familiar with the matter suggested that the Iranian Oil Minister will attend the OPEC meeting, but will refrain from participating in freeze talks.
Although persisting low prices will mean less profits from Iran, the possibility of more costly producers leaving the market could create an opportunity for the country to fill these openings as it ramps up production.
Algeria / Nigeria
Although different in many ways, these two OPEC members currently face similar problems. Both nations have been included in the RBC’s list of fragile oil exporters. Former African colonies of European superpowers, they are now victims of attacks from terrorist organizations Al Qaeda and Boko Haram. Lower energy prices are making it that much harder for these nations to fight encroaching threats.
With oil comprising 40 percent of the country’s exports, Ecuador is an active supporter of cutting output to lift prices higher. The local authorities are actively advocating a production freeze and the nation’s Oil Minister Carlos Pareja is due to visit Mexico and Colombia, countries outside the OPEC syndicate, next week in efforts to create a united Latin American front with Venezuela already on board. Related:Forget The Tough Talk – Saudi Arabia Is Desperate For A Production Freeze
Last, but, definitely, not least, is Saudi Arabia, the world’s largest producer. It was Saudi Arabia who initially refused to work out a joint output cap back in 2015. Set to push the more costly U.S. shale oil producers, as well as pressure Russia, off the market, Saudi Arabia is now facing its first budget deficit in years and is searching for means to cut spending and lessen its dependence on oil.
On April 1, the Saudi Deputy Crown Prince Mohammed bin Salman unveiled a grand plan of an investment fund with $2 trillion capital, turning the Middle Eastern country from the world’s largest oil producer to the world’s biggest investor.
Prince Mohammed also stated that his country would not consider any output freezing deal if Iran is not going to sign off on it.
Considering how mixed are the goals of the countries set to participate in the Doha meeting, it will be sheer market force of an individual nation or a party of such that could shift the scales to either side.
With Iran openly excluding itself from the negotiation process and Saudi Arabia opposing further developments without the former’s participation, it is almost certain that the meeting on April 17 will be no more than a gathering of people, who, most likely, loathe to even be in the same room with one another.
Nonetheless, with two weeks remaining, there are still many opportunities for certain sides to rethink their take on the output matter.
By Donald Levit via Economiccalendar.com
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