John Hall: The 166 th.
Meeting of the OPEC Conference
Vienna, Austria, 27 th . November, 2014
So, with relative oil price stability since 2011 until the last meeting in June of this year, OPEC today decided to igno.re the dramatic fall in prices of around $30 per barrel and take no further action and allow the market to stabilise itself. Within minutes of the announcement, Brent dropped $5 to $71!
In the run up to the meeting conjecture raged as usual with claims of OPEC “keeping the market guessing” but the truth was, OPEC collectively didn't know itself what it was going to do. Ironically, those countries that are suffering the most from the lower oil prices are not the ones with influence. They may have a voice in the market but when it comes to the raw decision making that is left to the unofficial leader, Saudi Arabia, supported by Kuwait, Qatar and UAE.
The internal argument to reduce output from the official level of 30mbpd to something less, possibly 29.5mbpd was strong particularly from countries like Iran and Venezuela. They tend to sit on the outside of OPEC, being the so called Hawks, and on the opposite side to Saudi and its followers who are more pro than anti West. Yet, overall, each OPEC producer has suffered due to lower oil prices and there is the bigger picture, which all will understand, but only Saudi will recognise and respond to. I spoke briefly to ministers from Angola, Algeria and Kuwait and each seemed relaxed and content with their sales volumes now transferring from West to East.
How is it, that with so much geo-political uncertainty in the supply sector, and with winter approaching, with even freezing temperatures in Florida and severe snow storms in the northern parts of the US, that oil prices have not responded? Geo-political tension not just in the Middle East but in Africa too and in Eastern Europe, where the Russia-Ukraine situation is rapidly deteriorating, we could have expected a more negative response. Since the last Meeting, hedge funds, not expecting this dramatic fall in oil prices have been offloading positions and fuelling the downward torrent further. Prices have been maintained for so long at $100+ that to fall now could seem unrealistic. Perhaps one has to accept that prices have been too high for too long?
Back in October 2009, as oil prices were making their way back up beyond $70, OPEC was concerned that, as prices moved towards $80, that the global recovery following the 2008 financial crisis would falter and OPEC would be blamed. However, it wasn't sure what was driving the price up. Today, six years on, many countries within the OECD have not yet recovered, the financial crisis is still with them, demand for oil has not recovered and alternative fuel sources, primarily shale, have risen up and impacted on demand for oil and not just OPEC oil. The fear that the higher oil price would curtain recovery has happened and today we can argue that we are seeing price correction.
Today, some would have expected OPEC to have imposed a dramatic reduction in output but how would this be orchestrated? Would they have expected Saudi to cut so that the rest of them could step in and capture market share? Saudi doesn't think so!
There are many scenarios to be taken in to account and it may be argued that the Saudi agenda goes further than to just take a commercial decision, to restructure the market and allow supply and demand to balance out naturally. The oil price has an impact favourably on many current geo-political situations:-
Reinforcement of sanctions on Russia over Ukraine and its general strategy in the region and around the external borders of pro-Russian countries, such as Serbia which has recently welcomed Putin
Reinforcement of sanctions on Iran over its nuclear programme which could speed up settlement
Lowering of long term gas price contract prices which are linked to oil price
Support for struggling OECD member countries to get out of long term recession
Lower distribution costs as refined product prices fall, namely Diesel & Gasoline
Conversely there are negative implications elsewhere:-
Curtailment of Shale development in the US
Lack of capital funding
Reduction of development in energy resources, renewable and otherwise.
In effect, from purely the energy aspect, does the world want to have adequate supplies of energy at a higher price and that is a price not driven by demand but one driven by cost, or, less choice in energy options with unsustainable supplies at a lower, yet uneconomically produced price? Somewhere, a balance needs to be struck and I have maintained since 2008 that a price for Brent crude over $100 is not sustainable. Furthermore, I did not expect to see such a dramatic fall in prices since the Meeting in June. I don't believe many did.
The market has ignored most geo-political tension points – in the Middle East, increased tension between Israel and Palestine, which years ago was the key driver in the region, the war in Syria, the rise of the Islamic State and its impact on Kurdistan & Iraq and Turkey, leading to the return of US troops to the region and yesterday, Yemen's export pipeline was again blown up. Ironically, Hamas which is supporting Palestine has even said that IS is a greater threat than Israel while, the uncertainty of the overall impact of IS on Iraq could curtail long term development in the region.
Elsewhere, the division of Libya and the civil strife that has followed, the curtailment of Iranian output by sanctions, exacerbated by the failure to reach a settlement this week over the nuclear programme and, ultimately, the threat of reduced gas supplies from Russia will all have a knock on effect. Natural events, like cold weather in the US and Europe, as we move in to the winter period, usually cause an increase in price. But, for now, the oil price just has not responded! Perhaps apathy has set in and markets have for too long over reacted to every potential crisis when, more often than not the threat has been resolved.
Saudi, in my view, is going it alone. It can afford to sell cheaply, and at a loss, to regain market share over the longer term. The US is not driving this agenda but it does support it, even though Shale development is already being curtailed. However, the increased pressure that the lower oil price is applying to Russia and Iran and even Venezuela, which regularly berates US policy while also looking to the US as its largest customer, is overall probably very acceptable to the US administration.
Within the US, the lower gasoline prices have had an impact domestically and traffic movement has built up. Retailers can now supposedly attribute an increase in profitability to lower gasoline prices and with the Obama administration under pressure, some good news like this is very welcome to voters.
For the oil producing countries and beyond, fuel subsidies are crippling them but, a lower price could be an opportunity to reduce those subsidies, in countries that are confident enough to do so, but, since the advent of the “Arab Spring”, most have been reluctant to take any such action. However, Indonesia and India are doing it while in the OECD sector opportunities for duty increases must be under consideration, unless an election is also on the horizon.
In my last report, after the June Meeting, I said that OPEC was happy with the oil price ranging between $105 and $110, although consumers would expect the price to be closer to the $80-90 range. That is what has happened. Is it simply short term or can we expect to see a resurgence in the New Year? My guess is that prices will take some time to recover upwards and perhaps OPEC will accept that a more realistic level will be some way below $100. For now, output will be retained at 30mbpd and each member will be expected to respect their agreed levels, but, if there is a sale to be had, they will take it even if it means overproducing!
Looking at production figures, these are difficult to follow precisely as accuracy cannot be guaranteed. One delegate actually told me some time ago that they had difficulty understanding figures from both secondary and direct sources which included fellow members! Taking those published from secondary sources until October, which appear more complete than those supplied directly, it would appear that market output has been maintained over the year to date and there has been no reduction in output. What we don't know is if all oil produced has been sold or stored.
On the face of it, output has not suffered and OPEC is still producing over 30mbpd. The only anomaly in this context is Venezuela. Some years ago, Venezuela demanded that the Secretary General should visit the country, for them to demonstrate to him an output level close to 3mbpd. Until the end of Q2 this year, Venezuela has been reporting 2.8mbpd, but nothing since then, which contrasts strongly against the figure of 2.3mbpd, supplied from secondary sources which have maintained this level until the end of October. My guess is that the lack of investment in PDVSA, the state owned oil company, has finally come through and as Venezuela needs a production cost of around $117pb, it is very vulnerable to the lower prices of today.
As prices fall benefits are quickly perceived and in Europe, where taxation on fuels is high, any opportunity for a reduction is seen as good news. Since the end of June, the Brent Crude price has fallen by $35 or 32% from $112 to $77 but as we do not run our vehicles on crude, we have to relate to prices paid for automotive fuels.
We also have to adjust these prices from dollar to sterling. There has been a fall in Diesel and Petrol prices by 17% and 25% respectively, but the commodity element is only one part of the equation and less than half of the overall price. In the UK Diesel and Petrol have a duty level of 58ppl added and then, VAT of 20% applied over the combined commodity plus tax price. So a price of 130ppl in June, for Diesel, should today be around 121ppl, 9ppl cheaper. Correspondingly, for Petrol, the same price of 130ppl in June should now stand at 118ppl, giving a reduction of 12ppl. There will not be any compensating duty increase in the UK before 31 st . August 2015.
The year started well for the OPEC Basket and by the time of the last Meeting they were enjoying a price for Q3 of $100.86 but from that time it fell in line with the Brent price, achieving $96 in September, $85 in October and around $75 in November. It has remained there in recent days, not showing any real sign of enthusiasm for anything that OPEC might have done up until this Meeting. Looking at what each member supposedly needs, to balance their fiscal budgets, only Qatar and Kuwait can survive. There has been little long term planning and many OPEC members have spent indiscriminately and not invested in the infrastructure for the future. Whether the lower oil price will force some level of discipline into the administrations or not we shall probably never know. The opportunity is there because the market will turn and prices will rise more slowly, to allow for adjustments to be made by consuming nations, as they catch up and move themselves out of recession.
Today in Vienna, the proceedings were opened by the Head of the Libyan delegation. What is frustrating about Libya is that there is an official minister and an unofficial one, reflecting the physical division of the country but neither was present today. He made the point that since the last meeting, the global economic recovery has continued, although at lower levels, that he expects global economic growth in 2015 to rise from 3.2 per cent to 3.6 per cent. Similarly, world oil demand in 2015 is forecasted to grow by around 1.1 million barrels per day, with total world consumption at around 92.3 million barrels per day and the bulk of this net oil demand growth will continue to come from non-OECD countries.
Next year OPEC expects non-OPEC oil supply to rise by 1. 4 mbpd, giving an average of 57.3 mbpd, with the bulk of it coming from the Americas. In terms of price, he suggested that although the OPEC Reference Basket had been fairly stable during the last three and a half years, ranging from $105 and $110 per barrel, since mid-June it has lost 30% of its value. They do not feel that the recent fall is exclusively attributable to fundamentals but also to the impact of speculation, as we have already noted. Demand will pick up and support the market, with opportunities for alternative fuels and climate change directives. They are also aware that if the current trend continues, the long- term sustainability of capacity expansion plans and investment projects may be put at risk.
Looking ahead, Geo-political tension will need to be monitored and particularly threats from both Russia and IS. In the short term, there is definite uncertainty on oil prices and we can expect a further drop, but with winter coming on and lower prices filtering through to build up recovery, we may see the stabilisation that OPEC is hoping for. However, with the price rapidly falling now, already $5 within the hour of the meeting ending, how much further will it go and will OPEC feel the need to re-convene before June? I shall be there, whenever it is!
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