The 168th. Meeting of the OPEC Conference,
Vienna, Austria, 4th. December, 2015
The Meeting today could have gone either way but, OPEC or rather Saudi Arabia, decided to continue maintaining market share at the prevailing price. There was a call to cut by 1.5mbpd but Saudi was not to be swayed by internal pressure. Instead OPEC has sent a defiant message to the market that it intends to protect its market share.
With output at around 31-32mbpd in November, it will take no further action but to monitor the market until the time of the next Meeting in June. It has brought Indonesia back in to the membership and is mindful of the return to the market of Iran in the New Year. Over next year it is expecting demand for its oil to average 30.16mbpd, some way below its average production forecast of 30.8mbpd excluding Indonesia, which has until recently been classified as non-OPEC
A “proposal” had been put forward supposedly to re-enforce quotas and reduce output by around 1mbpd while Iran is hoping to be allocated an increased quota for next year. This would need non-OPEC support but would not include the US as the US Constitution would not allow it to participate in any form of market manipulation. Being realistic, such a reduction would give psychological boost to the market.
With more oil on the way from different sources including Iran, Iraq and Libya within OPEC and the US and Canada from the outside, it would have lacked impact. In the short term, it had some credibility and gave speculators some respite as Brent dropped close to 42.50 on Wednesday and then back $44.50 today while the OPEC Basket Price fell yesterday $37.89. As news broke from this Meeting, the price of Brent was moving down towards $40. OPEC now will have to hold output at all cost.
Excellent news for consumers but bad news for all producers and explorers, particularly for Algeria, Iran, Iraq and Venezuela which are suffering financially, seriously, due to the low oil price. The Shale industry has hit OPEC hard by putting another 4.5mbpd in to the market and although output has dropped slightly, the overall volume remains.
OPEC will need to maintain its strategy which will hurt the industry further but will it be enough in the longer term as the shale industry streamlines and adjusts itself to operating in a lower priced environment, ready to ramp up as prices rise? Furthermore, can OPEC adjust similarly?
The conference was opened by Dr. Emmanuel Ibe Kachikwu, Minister of State for Petroleum Resources of Nigeria and President of the OPEC Conference.
He reminded us that in the six months since the last Conference In June, we have witnessed continued volatility in the global oil market. Prices have continued to drop with the OPEC Reference Basket decreasing from a monthly average of around $60 per barrel in June to just over $41 per barrel in November. This decline reflects the continued oversupply in the market with crude and product storage at record highs.
Taking a look at the economy, global economic growth in 2015 is set to be 3.1 per cent. This is slightly lower than that forecast at the last Conference, mainly due to a deceleration in some emerging and developing countries. Next year looks brighter, with global growth forecast to be 3.4%.
OPEC expects that World oil demand in 2015 will grow by 1.5 million barrels per day, up from 1 million barrels per day in 2014. Next year, they foresee growth of 1.3 million barrels per day to average 94.1 million barrels per day, with most of this growth coming from non- OECD countries. As far as supply is concerned, non-OPEC countries will continue to see significantly reduced production growth as compared to past years. In fact, in 2016, they anticipate a contraction in non-OPEC oil supply.
This downward trend stems mainly from the impact of investment cutbacks and the drop in US tight oil output, which has been declining since May of this year. This is clearly illustrated by the drop in the number of newly drilled wells and the reduction by half of active drilling wells.
These developments indicate the onset of a more balanced market in 2016, with demand for OPEC crude expected to rise by 1.2 million barrels per day to average 30.8 million barrels per day for the year. A balanced and stable market will be of crucial importance in the years ahead to ensure continued investment in the industry as it gears up to meet the world's burgeoning energy needs.
So the opening address from OPEC set the scene for their thinking, some optimism all round culminating in the need for a “balanced and stable market” which only OPEC can created by cutting output. In spite of any informed conjecture before an OPEC Meeting, very few really know for sure what will happen.
One can argue afterwards that the members had no other option, but, as we learnt last December, there is always the chance of a last minute surprise, often reflected by the size of the media camp that attend these meetings. That decision has resulted in the collapse of the oil price, the rebuilding of stock levels and cuts in capital projects.
I managed to speak briefly to Dr Salah Khebri, Minister of Energy for Algeria. They are investing heavily in to solar power as others particularly in North Africa are able to do. His output is around 1.2mbpd and he too would hope to increase on this, as I guess they all would. I then spoke to Jose Maria Botelho de Vasconcelos, Minister of Petroleum for Angola, and his market has moved away from the US which is now down to only 3%, it was closer to 18% earlier in the year and he is selling in to Latin America and the Far East. Over the year prices have averaged around the $50 mark and something closer to $70 would be better although he did seem to indicate that the $100 level was not feasible. There is a real acceptance now that more realistic price levels are here to stay.
We follow Fundamentals and Technicals and from them assess the market and then there is OPEC. Whereas there is some logical synergy between Fundamentals and Technicals, OPEC is the maverick. The world is now awash with both oil and gas with OECD oil stocks at just under 3bnb giving around 63 days' usage. Saudi Arabia is alone as the only OPEC member that can cut production enough to make a difference. It has learnt, to its cost, that when it cuts, other OPEC members and non-OPEC producers will step in and take its market share.
With the higher prices in the lead up to last December, Saudi had lost much of its US market share to Shale. Since then, it has attempted to replace that lost business by breaking in to the European Markets which have been the traditional market zones of Russia. It is discounting prices to compete with Russia and the US plus other OPEC members and it would not make sense to cut now and revert back towards the position held prior to December 2014.
OPEC has priced itself out of the market and should now expect to sell oil at the price determined by the market, as it has always claimed it should be, and not set against excessive budget needs. Furthermore, all members need to diversify. All producers are suffering the impact of the lower prices but of Saudi and Russia, Saudi could outlast Russia but without synergy between the two in terms of curbing output they are destined to continue competing until either one collapses or demand rises significantly to support them.
By letting the oil flow find its own level, Saudi was hoping that others might agree to a cut or that alternative energy sources, like shale, would suffer due to lower prices. The US shale rig count and output have both fallen but overall output still exceeds demand. It has some way to go before it balances.
Meanwhile Iran is planning to push another 1mbpd+ in to the market and is already looking for partners to work with it. It is not interested in talking about cuts! More bad news for Venezuela who can usually count on Iran to support the call to cut. This time Venezuela is isolated and facing financial ruin.
Under Hugo Chavez, PDVSA was mismanaged and revenue spent on non-energy related projects and since Nicolás Maduro has taken over, there has been no change. Elections are due to take place this weekend yet the leader of the Opposition Leopoldo López is in jail and his wife Lilian Tintori who is campaigning for him, fears for her life. It will be a difficult one for the opposition to win but without reform Venezuela cannot survive. In February, PDVSA published figures claiming that oil production in the Orinoco Oil Belt was at 1.3 mbpd and that this could increase to 4 mbpd by 2019, so in the next three to four years, Venezuela should not be looking to cut either although, today, it was calling for an OPEC cut of 1.5 mbpd!
If non-OPEC producers like Russia had supported the move to cut, it would have worked in the short term but with the US on the verge of exporting oil there will soon be another contender for a European market share.
Historically, the market has been self-regulatory and demand has traditionally been driven by price but today, after five years of high pricing consumers have moved towards alternative energy sources, energy efficiency and conservation while being mindful of climate change and the impact of continued use of fossil fuels. OPEC knew that this would happen but enjoyed the benefits of higher pricing and those that did not plan for the future and diversify will now have difficulty in surviving. It will be an ideal time for all producers to evaluate and adjust domestic subsidies.
Many of the OPEC members provide very cheap or free oil to their people and as populations increase and affluence extends, a greater proportion of output is required to satisfy domestic need. When I brought this up last year with Mr El Badri, Secretary General, he impressed upon me the sensitivity of the subject while afterwards I was advised that I should never have brought it up anyway!
The chart belw clearly illustrates the peaks and troughs that have taken place over the last twenty-five years and depending on the circumstance, the peaks have usually corrected themselves.
Before then, in the second half of 1973 when OPEC sold directly to oil companies and accounted for about 80% of internationally traded oil, its power was demonstrated when it imposed a series of unilateral price increases coupled with a reduction in output. The price soared to $11 pb. From 1978 as OPEC increased prices further to around $18 pb in 1979, economic stagnation followed leading to a drastic rationalisation as consumers sought ways of conserving energy through more energy efficient processes.
Later in 1990, at the time the Iraqi invasion of Kuwait over oil rights and the subsequent Gulf War, the spike doubled the price of oil but as soon as a level of peace was restored, it corrected. Fifteen years on, in 2005 the Kuwait Oil Minister admitted to me that, as Kuwait, he would love to have a price of $30! How the market has changed since then.
The spike in 2008 as the price of crude hit $147 and collapsed back again to below $50, was the turning point. Although few in OPEC will admit this, the high price of oil contributed to the financial crisis of 2008, just as it did in earlier years, keeping much of the developed world in or close to recession. But today, with lower prices and the availability of alternative energy sources fuels with a strong focus on energy conservation, consumers can recover without the traditional dependence on OPEC. The cyclical pattern over the years has again necessitated the need for consumers to reappraise their energy requirements and with greater innovations coming to fruition it would seem that OPEC has virtually priced itself out of the market.
Continued lower prices will encourage recovery. The US is performing well although manufacturing output is falling as it is in China where growth is running at 7% supported by greater activity in the service sector while Japan is back in recession. World growth is some way behind at 3% but at least still positive. We look ahead planning against various forecasts but we should also be wary that those who wrongly forecast the oil price at $200 in 2008 are now forecasting $20. This is significant because the price of oil is built in to the cost of many products and such direct and indirect costs would not be sustainable. The market players are committed to making forecasts but some figures are more credible than others!
OPEC has cleared the way for new markets – Energy Conservation & Alternative Energy sources – compelling it to have to compete in a far more efficient world that is not so heavily dependent on revenue for Oil & Gas. COP21 which has taken place this week in Paris is another bi-product of high energy prices. Although we have had previous gatherings of this nature – Kyoto & Rio – this is the one that seems to be more likely to have any long term impact than any before.
Geo-political tension has always had an impact but over the last year it has built up an immunity to it. The recent shooting down of the Russian fighter plane by Turkey caused a fluctuation in the price for a day or two but now with the OPEC basket down below $40 and falling, such issues have moved on and will now focus on what OPEC said at this meeting to justify their current policy of letting the market find its own level.
For much of the world, the focus is on Syria and the defeat of ISIS. A loose coalition is emerging to tackle ISIS while at the same time attempting to decide upon a strategy for Syria. One hopes this will recognize the needs of all inhabitants.
The current leaders now appear to be Russia and Iran, two countries at opposite sides of the spectrum to Western nations and Europe – Russia for its stance over Crimea and Iran for its ongoing nuclear aspirations. Yet some synergy has emerged from around COP21 as it so happens that all world leaders want to be seen there, making it an unofficial forum for other issues.
We also need to be mindful of the ongoing and sometimes mindless dialogue over Middle East Peace which has been running for many years and particularly since 1948. Sympathy and support for Israel is waning certainly across Europe and a serious initiative needs to be found but, it is just one of many issues simmering below the surface.
OPEC is not immune to any of this, Iraq and Iran are both embroiled in the ISIS campaign while Syrian oil is funding ISIS. Syria is not a member of OPEC but can attend OPEC Meetings as an observer, like Russia. Closer to home, in Yemen, Saudi is bombing the Houtis who in turn are supported by Iran – not a direct confrontation between two leading OPEC members but certainly a serious confrontation.
Within OPEC, Iraq is ramping up production with ambitions to soar towards 10mbpd, while Iran is waiting for the opportunity to release another 300-500,000 bpd in to the market and then increase this to over 1mbpd within twelve months. Indonesia is returning with around 900,000 bpd which will simply move from non-OPEC into OPEC.
These are all quota issues that OPEC will have to deal with and, in theory, as one increases others will have to cut to accommodate the other, to balance the overall output. Nigeria is restructuring and attempting to stamp out corruption and smuggling of its oil wealth and in time will have more oil to input.
Looking back over the last year, there have been key events and statistics to follow and I have included some of the latter in the table below
For OPEC it is more than just balancing the oil market as it claims to do. Saudi has always been the Swing Producer but today either the US or Russia could claim that title. As we look ahead, with geo-political tension to the side, what is the output for oil now? Forecasts have indicated that by 2030 it will have a 25% market share, equal to that of Coal and Gas but coal is rapidly going out of favour and although the world is awash with gas that too is a fossil fuel and if COP21 does gather momentum all three will be hit environmentally either by taxation or legislation while conservation and renewables make greater inroads.
Meanwhile, the US dollar, the currency in which oil trades are made, is weakening against major currencies and this will impact too. The outlook for OPEC is not clear and cannot be good. They should have foreseen this and diversified.
I have tried to reflect a balanced view in this report. Some will agree and others may have another view but if there are any points that you would like to discuss with me, please let me know.
The next OPEC Meeting has been scheduled for 2nd. June 2016. I shall be following events in the meantime and shall be there.
This has been a difficult Meeting for OPEC and if it is to survive its members will need to re-think and plan their strategies to work in a competitive market at a lower price. For now, it would seem that the oil price will range within the $40-60 bracket, perhaps even lower, dependent upon winter weather and also to geo-political events.