The Organization of the Petroleum Exporting Countries (OPEC) has decided to hold its production levels steady. Despite the oversupply in the global oil market, members did not agree to any supply cut at its meeting on Friday in Vienna, as the group is continuing with its Saudi-led strategy of fighting for market share, agreed upon last year, instead of throttling back to shore up prices. OPEC is producing roughly 31.76 mbd, according to IEA, well above its standing output ceiling of 30 mbd.
In the group’s final statement, it did not mention a new production ceiling, the first time this has happened since 2011, which apparently indicates that member countries can continue producing at current levels even with the ongoing surplus and very high levels of crude inventories. OPEC’s previous production target of 30 mbd is outdated, but with Indonesia returning as a member and Iran expected to increase exports next year, the cartel could not agree on a new figure.
“Having reviewed the oil market outlook for 2015, and the projections for 2016, the Conference observed that global economic growth is currently at 3.1 percent in 2015 and is forecast to expand by 3.4 percent next year,” OPEC said in a statement after its meeting in Vienna. “In terms of supply and demand, it was noted that non-OPEC supply is expected to contract in 2016, while global demand is anticipated to expand again by 1.3 mbd. In view of the aforementioned, and emphasizing its commitment to ensuring a long-term stable and balanced oil market for both producers and consumers, the Conference agreed that Member Countries should continue to closely monitor developments in the coming months.”
OPEC is keeping the status quo and hoping the market will rebalance itself with higher demand and decreases in non-OPEC supply. Most OPEC members are currently hurting amid an extended period of low prices, with some of them, such as Venezuela, seeing growing internal turmoil. “For OPEC to reap the benefits of their strategy, they have to survive it,” said Sam Ori, the executive director at the Energy Policy Institute at University of Chicago.
OPEC policy remains the same
The outcome of the meeting is unsurprising, as the week began with most observers confident that OPEC would leave actual output unchanged, but the fact that the group did not publish a new ceiling is a sign of dysfunction. Last night, oil ministers met in a Vienna hotel for an unusual Thursday evening meeting. Bloomberg reported that Ecuador’s Oil Minister Carlos Pareja noted the meeting was “difficult,” and that an agreement had not yet been reached. Meanwhile, Venezuela—one of the OPEC member states hardest hit by the low price environment—reportedly tabled a proposal to decrease output by 5 percent.
Rumors surfaced mid-week from Saudi sources that the Kingdom would propose a coordinated 1 mbd output cut, if joined by other major producers Iran, Iraq, and Russia. However, these rumors were quickly rejected by other official sources.
Top analysts have noted over the course of the week that, even if the rumors had been confirmed, it wouldn’t actually reflect a change in Saudi Arabia’s strategy or its public statements—a fact that was confirmed in the press scrum ahead of the official meeting. Saudi Oil Minister Ali al-Naimi stated, “We have said on more than one occasion we are willing to cooperate with anyone who genuinely wants to balance the market.”
Naimi clarified that this included non-OPEC producers, such as Russia. “I’m always ready to meet with any minister who wants to meet with me. How clear can we be?” He also added that there is “absolutely no disagreement” on strategy within the group’s members.
“We have said on more than one occasion we are willing to cooperate with anyone who genuinely wants to balance the market.”
Thus, even though Saudi Arabia is fully willing and able to balance the market, they simply don’t wish to shoulder the burden alone. It appears clear from this morning’s result that it will take forces outside of OPEC to rebalance the oil market, but it’s unclear how those forces will play out. When pressed on the issue of if there might be heightened volatility or an oil price spike due to underinvestment in higher cost production, Naimi said, “We are not concerned,” with a smile.
A lot of talk about quotas, but do they matter?
Rumors surfaced that the group would raise its ceiling to 31.5 mbd to take account for the group’s current production level. OPEC has postponed any decision on changing its target until the next meeting, when it will have more clarity on the effect of Iran increasing its export volumes after sanctions are lifted.
Iran’s oil minister, Bijan Zangeneh, reiterated comments made upon his arrival in Vienna yesterday, urging OPEC to return to individual country quotas. “Every country should know how much oil it should produce.” The issue of Iran’s output levels loom large over OPEC and the oil market, as the country aims to boost exports by roughly 0.5 mbd as soon as sanctions are lifted early next year. Even though Iran’s minister is calling for this, it’s even more unlikely given the meeting’s outcome.
A return to the system of using individual country quotas doesn’t appear likely, even as the collective target has proved increasingly ineffective. Jamie Webster, Senior Director of Oil Market for IHS, said, “It’s clear at this point that the group’s official target is totally irrelevant.”
“It’s clear at this point that the group’s official target is totally irrelevant.”
A return to the individual country quota system could increase accountability. When asked if a return to this system was possible or likely, Naimi didn’t comment. But on Saudi Arabia’s production, he noted, “The Kingdom has responsibility to maintain its production capacity of 12 mbd.”
Contradicting recent comments by members of the Saudi Royal Family regarding the country’s spare capacity reaching dangerously low levels, Naimi added, “There is a surplus in the market. We are not worried.” When asked if he is content with the state of the market, Naimi offered an existential response, “Is anybody content?”