The Fuse

Five Charts That Explain OPEC’s Predicament

by Jeffrey Gerlach | November 19, 2015

Next month, OPEC delegates will gather in Vienna to decide on a course of action that will have profound implications for the global oil market. One year ago, the group of oil-producing countries chose not to cut production in the face of rising non-OPEC supply. The resulting price collapse—precipitated also by lower-than-expected global oil demand growth—enabled the group of oil-producing nations to pursue a strategy of defending market share, despite the high breakeven prices needed for many member countries.

Most market watchers believe OPEC’s meeting on December 4 will not bring about any major strategic shifts. As a result, OPEC producers, just like the U.S. oil industry, will likely continue to experience strain due to lower prices. In fact, the low-oil price environment may endure well into the future. For instance, the International Energy Agency’s most recent long-term report predicts oil prices to gradually rise to just $80 per barrel by 2020, a price far below the $100 per barrel or greater seen from 2011-14. The IEA’s outlook may be conservative, but fundamentals are expected to remain loose for some time given non-OPEC supply’s resilience and current high inventory levels.

Ahead of next month’s meeting, Securing America’s Future Energy (SAFE) released its quarterly update to the Energy Security Fact Pack, a data-driven overview of the latest trends in energy security, including domestic and global oil production and consumption, oil market dynamics and prices, and up-to-date information on fuel efficiency and alternative fuel vehicles.

The following five charts from the Energy Security Fact Pack encapsulate the current challenges confronting OPEC.

1) Global Supply Continues to Outpace Demand

Growth in non-OPEC liquids supply has exceeded global oil demand increases for ten straight quarters, placing downward pressure on the amount of crude the market needs from OPEC. A number of forecasters expect this trend to shift in 2016 as high-cost producers in the U.S. and elsewhere slow output.


2) OPEC Supply Remains Far Above Call

Last November, OPEC producers decided against cutting production despite an oversupplied global oil market. OPEC has since increased supply by more than 1.3 million barrels per day (mbd) year-on-year as part of a Saudi-led strategy to defend market share.


3) Easing of Iran Sanctions Will Further Complicate Outlook

Sanctions against Iran led to more than a 50% decrease in Iran’s oil exports versus 2011 levels. However, sanctions are expected to be lifted over the next several months. Analysts believe a rise in Iranian exports could bring at least 0.5 mbd back to the global oil market in 2016 and further prolong the global oil supply glut.


4) Exporters Feel Low Oil Price Pinch

Low oil prices are forcing many oil exporting countries to rethink revenue and spending policies as they seek fiscal stability. Some countries have already begun to draw down foreign assets, and are likely to continue doing so in 2016.


5) Exporters Using Foreign Assets

Saudi Arabia has used an estimated $85 billion of its foreign reserve assets (approximately 11%) since the end of 2013, the most of any OPEC country. Meanwhile, Venezuela has depleted 80% of its foreign reserves.


There is no doubt that the current low-oil price environment, spurred at least in part by OPEC’s shift in strategy, is presenting serious fiscal challenges to many of its members. Countries hit hardest by the group’s output policy, such as Algeria and Venezuela, have been vocal in advocating for the group to support prices through production cuts. However, at least through next month’s meeting, OPEC, led by Saudi Arabia, is unlikely to reverse course.