Oil price plunge to continue as OPEC members unlikely to cut output
OPEC oil ministers meeting in Vienna on Thursday are in a bind. Prices are plunging – and in the short term, the cartel may not be able to do much about it.
Expectations that the group would not cut output to support the market saw the global price of oil slump another $1.89 on Thursday to $75.86 a barrel, extending its losses since June, when it was as high as $115.
That drop has been driven by a boom in shale production in the United States as well as weakness in some major world economies, causing supply to outpace demand.
OPEC powerhouse Saudi Arabia can weather such lower prices. But poorer OPEC members like Venezuela and Nigeria need levels close to $100 or above to fund national budgets. Saudi rival Iran too is suffering, with the price drop adding to huge revenue losses due to sanctions on its crude sales imposed over its nuclear program.
OPEC still accounts for a third of the world’s oil sales, but the 32-per cent fall in prices is straining the tenuous image of unity it strives to project.
With its hands tied, the organization may opt to do as little as possible. That means rolling over its present production ceiling of 30 million barrels a day and urging members not to overproduce.
Saudi Oil Minister Ali Naimi said as much Tuesday, telling reporters he expects the oil market to eventually “stabilize itself.” That’s shorthand for sit back and wait.
Analyst Fawad Razaqzada, of Forex.com, says that’s smart strategy.
“If the OPEC were to trim the production limit, it will therefore concede more market share to shale oil producers, so it is not in the best interest of its members in the long term,” he said.
The cartel was able to stem a sharp drop in prices in 2008 by announcing its largest production cut in its history. But crude prices moving into the comfort zone then allowed members to overproduce past laxly observed output targets.
Present prices are manageable for the Saudi government, as its coffers are well-padded and its oil production costs are relatively cheap. Not so for many others within the Organization of the Petroleum Exporting Countries with higher extraction costs and national budgets dependent on higher crude revenues.
They are the most vulnerable. Even if OPEC is able to surmount internal differences and persuade all members to slash production, poorer OPEC members would be hurt because reduced output means reduced income.
That leaves the next move to the Saudis – again. They could cut back production and ride out any market loss.
Instead they appear to favour the opposite strategy – maintain output to the point where oversupply drives prices below the level making shale oil production economical. That, at least in theory, would force shale producers to cut back, reducing the glut and drive prices upward again.
Experts say shale oil production turns too costly at the $60 a barrel level. That means that if the Saudi strategy works, consumers would benefit in the short run – and OPEC over the longer term once prices rise.
“The Saudis want OPEC to remain relevant,” says analyst Phil Flynn. “The only way in their mind is to subdue the U.S. shale producer.”
