Gridlock in OPEC

The December 4 meeting of the Organisation of Petroleum Exporting Countries (OPEC) did not throw up any surprises. In the bid to stick to its strategy of defending market share by maintaining output and driving down higher-cost production elsewhere, further gridlock is emerging within the oil cartel which has markedly reduced this once-powerful group’s effectiveness and influence.

Rather than add an element of stability, an internally divided OPEC will contribute to further volatility in oil market, with prices remaining low for longer than many anticipated with weaker members of the cartel fearing prices may slump further towards $20.

The now 13-member countries of the oil cartel will keep producing oil at their current high levels, effectively acknowledging their inability to push up crude prices. The organisation’s endorsement of present output, which is more than 1.5 million barrels a day above the formal ceiling of 30 million barrels, is likely to push the price of oil further down.

The ministers of OPEC appeared to have little choice. Officially, OPEC said member countries should “find ways and means to deal with the challenges they are facing in the global oil market today”. Unofficially, what that means is that individual member states will not feel constrained by any OPEC agreements on output levels. As a result, they all are likely to produce as much as they can. Major producing nations in the cartel were opposed to reducing output.

The ministers, however, agreed to readmit past member, Indonesia, to expand their ranks to 13. While that country’s production goes mostly for domestic consumption, that move could also add to the total amount of OPEC barrels on sale.

Iran hopes to bring an extra 500,000 barrels on the market by early next year. The Middle East country hopes the extra output will be accommodated within OPEC’s formal ceiling of 30 million barrels a day.

There were media reports before the meeting that Ibe Kachikwu, Nigeria’s minister of state for petroleum, said the country would ask OPEC to pressure Iran to delay its plans to increase its oil exports when nuclear sanctions are lifted, a comment which did not go down well with Iran as the country’s oil minister, Bijan Zanganeh, in a quick response blasted Kachikwu for his comments, saying he was speaking “out of his competence”. Zanganeh said Iran would boost its crude exports by 1 million b/d within six months of the lifting of international sanctions imposed on its oil sector, which, according to some Iranian officials, could be as early as January 2016. However, Kachikwu later made a clearly contrasting statement, saying that Nigeria was not worried about Iran’s return to the market and that it would be “ridiculous for any OPEC member to expect Iran to stay out of the market”.

Iraq is also resurgent. The country has seen the fastest rise in crude production in the world this year. It was pumping more than 4 million barrels a day last month and was responsible for last month’s biggest monthly rise in output among all OPEC countries.

OPEC pumped more oil in November 2015 than in any month since late 2008 and forecast little increase in demand for its crude next year, pointing to a larger supply surplus even as low prices hurt rival producers. OPEC production, which has surged since the policy shift of November 2014 led by Saudi Arabia and Iraq, is far higher than forecast demand. Supply rose by 230,000 bpd in November to 31.70 million bpd, which is the highest monthly rate since late 2008 when Indonesia was still an OPEC member.