It is no secret that OPEC and Russian production levels have created a global supply glut causing prices of crude oil to deteriorate dramatically, as both nations aggressively compete for market share in Europe and abroad. A low price for crude oil of just 38.25 was reached in 2015 from the last high of 107.68 set in mid-2014. Crude trades at just 40.25, and despite the two short-lived seasonal bounces encountered this year as refiners retooled for summer gasoline and heating oil production, there has been no significant data as of yet to indicate a turnaround.
The less “fortunate” OPEC nations have encountered financial troubles with persistently low oil prices, which has made it difficult for them to cover costs and have allowed deficits to spiral out of control. There have been several calls from Algeria, Angola, Nigeria and Venezuela for Saudi Arabia to cut production levels. The aforementioned nations are likely to cause a stir at this OPEC meeting, as they are less resilient to perpetually low barrel prices and remain far more pressurized financially at the moment than Saudi Arabia, who can withstand longer periods of low oil prices in their pursuit for market share and overall dominance. Saudi Arabia’s oil minister Ali Al-Naimi pledged to “listen” to the concerns of other members before any decisions is rendered at the Dec 4th meeting.
As sanctions ease for Iran on the back of the Nuclear Deal, an additional 0.5 mb/d may come online from the nation’s oil producers as early as 2016. Iran’s Nuclear Report, and the results therein, serve as the initial steps on the road to any further easing of sanctions. It is likely that Iran will rally alongside Algeria, Angola, Nigeria and Venezuela to persuade Saudi Arabia to cut production and help regain some control within OPEC.
Current, independent figures, suggest that OPEC has produced 32.1 mb/d figures for the month of November up from 31.4 mb/d in October, making this the 18th month consecutively wherein production has been exceeded its 30 mb/d target. Note that that expectations is formed ex-Indonesia, whose OPEC membership status is to be formalized at this meeting. Indonesia’s integration into the group is likely to add approximately 0.9 mb/d. Expectations for the new OPEC target including the 13th member, Indonesia, will be in the area of 31.0 mb/d. High-end estimates of 33.0 mb/d incl-Indonesia assume that the new target will be updated in-line with current OPEC ex-Indonesian production of 32.1 mb/d, rather than the 30.0 mb/d target which has been exceed for 18 consecutive months, added to the expected 0.9 mb/d Indonesian output figure.
As the meeting looms, crude prices have tumbled as oil bears drive price action on pre-meeting jitters, and traded below $40.00 today for the first time since the summer. It remains clear that market participants will be eagerly awaiting further information from OPEC, however it is unlikely that long term bargain hunters turn-up in the marketplace before OPEC decides in favor of a significant policy shift.
This may be a landmark OPEC meeting, though many factors such as, Indonesia’s likeliness to ramp-up production, Iran coming back online in tandem with the easing of sanctions, a lack of cooperation among OPEC members internally, and no clear commitment between Saudi Arabia and Russia to cooperate going forward, it becomes difficult to subscribe to the bull case for oil prices.
-David Felkai Uptick GMA.
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