OPEC meeting: No surprises!

The just concluded OPEC agreed to cede no ground to rival producers, keeping its faith that US shale drillers and other higher-cost rivals will capitulate first. Prices were down a bit on June 5, but crude oil rose 1 percent, reversing an earlier decline.

OPEC pumped 31.58 MMbopd in May, exceeding its quota for a 12th consecutive month while Saudi Arabia is deploying the most rigs in at least two decades and operating with the lowest spare production capacity in about three years.

OPEC ditched its traditional role of supporting higher prices to boost revenues despite the collapsing oil market and a stubborn global supply glut that is fuelled partly by US shale.

The 12 nations kept their combined daily production target at 30 MMbbl after meeting in Vienna in line with what all industry experts who spoke to BusinessDay West Africa Energy had predicted.

“OPEC will most likely stick with its November ‘take no action’ policy in response to the oil price. The defence of its market share has been a major preoccupation since oil prices started their steep fall in June 2014. OPEC has a stoic position with regards to its strategy of retaining output in the current climate. OPEC’s view is that high-cost shale supplies in the US are now being culled, and that oil demand is picking up”, said Rolake Akinkugbe, Vice President/Head, Energy and Natural Resources at FBN Capital.

The United States has significantly ramped up its production of oil extracted from hard-to-reach shale, or sedimentary rock, now producing 5 million barrels per day, making the country far less dependent on imports from the crude-rich Middle East.

With the status quo affirmed for now, OPEC appears comfortable with its strategy to play for market share, and the markets will have to continue on their path towards slowly balancing out. The organization set its Saudi-conceived strategy of defending market share rather than prices in November. Since then, it has pumped ever more crude into global markets.

While that has driven down energy costs for consumers and helped keep inflation in check, it has also spurred a record slump in the number of active US oil rigs and forced rival producers to cut billions from spending plans.

Heading into the meeting, OPEC officials cited the early success of its market share strategy. Having forced US shale production to level off and rig counts to drop by more than half, Saudi Arabia and its OPEC companions are maintaining their share. They expect that to continue. Also, prices have rebounded from their lows, jumping from the mid-$40s per barrel for Brent to above $60. OPEC sees the markets balancing out in the months ahead, a trend already underway, which will lead to price increases, and all the while the group will have held onto its market share.

There is hardly harmony within OPEC. Iran had difficulty pushing its position. Iranian officials insisted that OPEC make room for its expected increase in oil output, assuming that western sanctions are lifted following an historic agreement with the West over Iran’s nuclear program. Iran may be able to ramp up its output with expected increases ranging from 400,000 barrels per day within a few months, to as much as 1 million barrels per day by next year. That would require some change in policy on behalf of OPEC. If a deal with the West is secured and sanctions are lifted, the November 2015 OPEC meeting will be much more interesting than the one that just concluded.

The other development was Indonesia’s push to rejoin the cartel after six years away. Indonesia used to be a full member of the group, but suspended its membership when it became a net oil importer in 2008. The gap between Indonesia’s production and consumption has only grown since then, but Indonesia sees more benefits of being inside than outside OPEC. In fact, Indonesia is keen to secure supply contracts with OPEC members, as it is planning on a major build up in refining capacity and needs crude supplies to fuel the production of refined products. Generally speaking, being a net oil exporter is a prerequisite of becoming a full member of OPEC, but Indonesia is pushing to regain full member status, perhaps as early as the November meeting.

Benchmark crude prices rallied 34 percent since reaching a six-year low in January and traded at $62.60/bbl. Prices will probably reach $75 by the end of the year, Iraqi Oil Minister Adel Abdul Mahdi said as the meeting. Most OPEC members think $75 is a fair price, Iranian Oil Minister Bijan Namdar Zanganeh said.

FRANK UZUEGBUNAM