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Oil Price: Is OPEC Back In Charge? by Ubongusoro(m): 7:09pm On Oct 01, 2016 |
OPEC, the oil producers' group is back in the
driving seat.
Well perhaps it is. It certainly took the
commodities markets (and me) rather by
surprise when it agreed to cut production at a
meeting in Algiers.
In fact the group has a lot of work to do before
it has a real and sustained impact on the price.
But that decision was not what the market
expected. Traders thought the result would be
more disarray, as there was at a meeting of
OPEC and some other oil exporters in Doha
back in April.
Economic pressure
This time they did manage to make progress.
The context for the Algiers decision - and the
unsuccessful attempts to agree action before - is
crude oil prices are less than half what they
were in June 2014.
That hurts OPEC member countries.
Government finances and economic
performance have taken a substantial hit.
In Saudi Arabia for example, the government's
finances were in surplus to the tune of 12% of
annual income (GDP) in 2012. Last year there
was a deficit of 16%.
Angola's economy grew 7% in 2013. Last year it
was 3%.
Venezuela's figures are much worse, though it's
far from being entirely due to the lower price of
oil. That has however severely aggravated the
economic damage done by the country's political
crisis.
OPEC member countries have felt this financial
pain with increasing intensity for almost two
years now.
OPEC doesn't account for the whole market by a
long way. There are very large oil producers that
are not members, notably the United States,
Russia, China and Canada. But the group, which
currently has about 40% of the global market
can move it by cutting production - and it does
have a history of responding to low oil prices, by
cutting production.
The Iran factor
In the past Saudi Arabia, the group's biggest
player, has often led the effort.
This time the situation was complicated by Iran's
emergence earlier this year from international
sanctions over its nuclear programme. Tehran
was determined to take advantage and sought
to recover its share of the market.
For OPEC, the trouble was that Saudi Arabia was
unwilling to curb production without Iran doing
likewise, a position also underpinned by the
longstanding geopolitical tension between the
two countries which are the leading powers in
the Gulf.
That tension was the reason for the failure in
Doha in April.
Things seem to have changed. Iran has boosted
oil production already. It could go higher, but
not as easily as was the case in the immediate
aftermath of the lifting of sanctions. Saudi
Arabia has softened its position.
The oil minister Khalid al-Falih, who was
appointed after the Doha meeting, is reported
to have said in Algiers that Iran, as well Nigeria
and Libya would be allowed to produce "at
maximum levels that make sense".
The secretary general of the group, Mohammad
Sanusi Barkindo, told the BBC that those three
countries "have lost a considerable volume of
their production due to unfortunate
circumstances". He said "they will be treated
differently."
Shale oil competitors
It also appeared to be the case for some time
after the price fall began in 2014 that Saudi
Arabia was willing to tolerate the situation
because of the pressure it put on competitors,
especially shale oil producers in the United
States.
The rise of this sector over the last decade or so
is seen as a key factor behind the plentiful
supply of oil that partly drove the price fall.
Some shale operators have cut back, but overall
oil production in the US in 2015 was higher
despite the lower prices. If the Saudi aim was to
squeeze the American industry, they have not
had anything like the success they hoped for.
It does look as though the Saudis have decided
they need a new strategy.
So OPEC agrees they want to take action to
push prices up. The detail will be difficult to
negotiate.
How will they allocate the production cuts
between members? How differently will Iran,
Nigeria and Libya be treated? And what baseline
level of production will they use in calculating
new production ceilings?
It's also likely they will want some non-members
to cooperate. The US and Canada won't. They
don't believe in the kind of market management
that OPEC is trying to achieve and in any case
oil production is done in those countries by
private businesses which will not take orders
from energy ministers.
Russia, however, might be willing to come on
board and did discuss the possibility at the Doha
meeting.
And then with OPEC there is always the
question of whether member countries will
comply with any agreed limits on their own
production.
The reaction of the oil market to the Algiers
agreement is telling. The price of crude oil rose
and then fell back. It remains very much within
the range that it has been trading in for the last
six months. In short it looks like the market view
is that something has changed at OPEC, but
traders will need to see OPEC filling in all the
details of an agreement before they are
convinced that prices really |
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