Don’t expect Saudi Arabia to back down when OPEC meets
Cartel may ‘splinter as each country has different agendas and priorities’
Despite a nearly 30% fall in oil prices since a June meeting, don’t expect the Organization of the Petroleum Exporting Countries’ top exporter, Saudi Arabia, to back down from its strategy of fighting for market share.
Instead, on Dec. 4 in Vienna, members of the oil-producing group are likely to spend their final meeting of 2015 much like they’ve spent the entire year so far: complaining about low prices but doing nothing about them.
“Saudi Arabia will say no change,” Brian Youngberg, senior energy analyst at Edward Jones, told MarketWatch.
Any meaningful OPEC production cut would have to be spearheaded by heavyweight Saudi Arabia. But the Saudis have made it very clear in the past year that they don’t want to lose ground in the oil market, especially as U.S. shale oil output remains strong. At a Thanksgiving time meeting a year ago, the group also left the production ceiling unchanged at 30 million barrels a day, where it’s stood since 2012.
“Smaller countries that are struggling will continue to plea for a change, but they have no say,” Youngberg said. And “Iran will reiterate its plans to bring production up in 2016 regardless of what OPEC says to do.”
“OPEC may ‘splinter as each country has different agendas and priorities.”
Brian Youngberg, Edward Jones
All of that, longer term, “could cause OPEC to splinter as each country has different agendas and priorities,” Youngberg said.
The oil market has already seen much squabbling among OPEC members this year, with futures prices for West Texas Intermediate CLF6, -0.23% and Brent crudeLCOF6, -1.00% each down by more than 20% year to date.
Earlier this year, WTI dipped below $40 a barrel for the first time since 2009.
“Smaller member nations are feeling the impact of current price levels…more acutely than is Saudi Arabia,” said Katrina Lamb, head of investment strategy and research at MV Financial. So “a fly on the wall at the conference may be more interested in what OPEC members are saying to each other than anything else.”
The group held a technical meeting in October that was attended by some non-OPEC producers, including Russia. And OPEC member Venezuela raised the idea of returning to a program of keeping oil prices within a set range.
Back in August, Venezuela asked OPEC to consider coordinating with Russia to discuss a strategy to stem the rout in oil prices. Well before that, the market sawhard-hit Nigeria requesting an emergency meeting.
Even so, Lamb doesn’t expect any of the calls for action to lead to a revision of OPEC’s current production target policies.
“Saudi Arabia remains focused on increasing market share in key markets, especially Asian markets, and more likely than not will continue to back the hands-off policies articulated at last year’s OPEC meeting,” Lamb told MarketWatch.
Slipping output
The oil market found some solace in recent data showing declining output from Saudi Arabia.
OPEC production fell in October for a third straight month to 31.08 million barrels a day, according to a survey by Platts, which said the bulk of the decline came from Saudi Arabia and Iraq.
In the first half of this year, Saudi Arabia was breaking production records sequentially, said Luana Siegfried, energy analyst at Raymond James.
But while the Saudis “cannot keep worsening the oil glut forever,” she still estimates that the country’s current production level, which stands above 10 million barrels a day, will last “at least” through the end of 2016.
“OPEC is convinced that the strategy chosen a year ago to let supply and demand decide where the oil prices should be is the correct one,” said Philipp Chladek, energy analyst at Bloomberg Intelligence.
“The situation OPEC has to deal with now, which is the rise of shale oil, is mostly likely not a temporary shock, but a lasting one,” he said. “So there is little OPEC can do about this other than trying to nudge the highest-cost producers out of the market by keeping prices as low as possible.”
News from the OPEC meeting may include more cooperation with Russia and Indonesia’s return as an OPEC member, but those don’t really have market-moving potential, Chladek said.
Even in the unlikely event that the cartel decides to make a change to its output ceiling at the meeting, the move might actually lean more toward an increase rather than a decrease.
The official quota may be raised from 30 million barrels a day to 31 million, said Chladek. “They are already producing more than that now. It won’t make that much of a difference.”
Source: MarketWatch – Don’t expect Saudi Arabia to back down when OPEC meets
