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• Rising non-Opec supply pips Opec's balancing power
• By keeping 30 million b/d, Opec set to flood market
• Experiment to find new price and fundamental balance
Opec's decision to keep its 30 million barrel per day production ceiling unchanged was widely panned by the market, which quickly dropped by $5 per barrel on the news, but it belies a major turning point for the 54-year-old organization. This was the meeting when Saudi Arabia drew a line in the sand that Opec cannot fight fast-rising non-Opec supply by simply cutting output itself, and other members readily -- or reluctantly -- agreed.
Saudi Arabia and other Mideast Gulf members, particularly the United Arab Emirates, had carefully been staking out a position to oppose any cuts in production, which were being loudly demanded by several member states, led by Venezuela. Those that backed a cut argued that the plummeting oil price, which had lost 30% of its value since June, needed to be supported by a decisive cut in production.
By keeping output at 30 million b/d, the 12-member group risks providing the market with far too much crude. Opec's own data projects a surplus of nearly 2 million b/d in the first half of 2015 at that output level.
One trader said Opec's decision was designed "to shake the tree hard" in the hope that lower oil prices would reduce output from high-cost producers and ultimately balance the market again. "You shake the market short term, you fix the market long term," said the trader, adding that it is unclear when that balance might be reached and at what price.
"Opec has realized that its main tool to manage the market is no longer effective," one Mideast delegate admitted. A cut today would just reduce Opec market share with no guarantee that such action would prop up the price, and then require another cut in about a year, as non-Opec supply continues to rise, the delegate said. The 30 million b/d ceiling is, however, close to the projected call on Opec crude in the second half of next year, which could help stabilize balances again -- although not necessarily lift prices, as the first half of 2016 could again see a large surplus.
Opec is entering a "new reality" and is fundamentally changing its market approach. A stable $100 environment is no longer viable, said Opec Secretary-General Abdalla el-Badri after the meeting. "We [have to] learn to live with the new circumstances," he said.
Opec faces a structural oversupply, brought about by a stable period of $100 oil for the last four years and fast-rising tight oil output in the US, said delegates after the meeting. Pushed into this new approach by Saudi Arabia, Opec is being proactive -- in the past it was usually reactive -- in allowing prices to fall, forcing expensive oil from non-Opec suppliers to be shut in over time, delegates argued.
Venezuelan Foreign Minister Rafael Ramirez, who holds the Opec portfolio, embarked on a world tour to enlist Opec and non-Opec support for a grand cut. He was able to lure non-Opec heavyweights Russia and Mexico to Vienna this week to join Saudi Arabia and Venezuela for an international oil conference, but the efforts in the end fell flat -- the Nov. 25 event failed to produce any solid commitment from non-Opec producers.
In the meantime, Saudi Arabia and its Mideast Gulf allies put together a proposal this week to roll over the current 30 million b/d ceiling. This was a scenario that was whispered as a possibility all week, but few onlookers imagined that Opec had the guts to hold production firm at 30 million b/d while the call on Opec was only 28.4 million b/d in the first quarter of 2015, daring the bearish market to plunge even further.
In the end, Saudi Oil Minister Ali Naimi was not bluffing, and was able to sink the Venezuelan proposal. Ramirez left the meeting without speaking to reporters. The Algerian delegation, which backed a cut, also was in disbelief that such a decision was pushed through. As the price began to plunge after the decision was announced, those states that face big economic challenges, like Iraq, expressed concern. "Not all states have the same financial resources as Saudi Arabia," said a delegate from Ecuador. But this is what the Saudis wanted, he said.
Traditional hawk Iran struck a more nuanced tone after the meeting. "There is no doubt that we have oversupply in the market. But how to manage it, it seems we need more time to see the reaction of the market," said Iranian Oil Minister Bijan Zanganeh.
Saudi Arabia is not trying to punish its fellow members, despite the raft of conspiracy theories. Instead, it is taking the view -- highly unusually -- that any cuts in production would be ineffective.
The choice to roll over the ceiling was a vote to protect both market share and revenues, explained a Mideast Gulf delegate. A cut in production, particularly in the 1 million b/d range, would have provided no guarantee that prices would stabilize, or indeed stop falling. Nor would it have stopped non-Opec from rising. Non-Opec production is expected to increase by 1.4 million b/d in 2015, according to Opec's latest estimates. Within Opec, Iraq plans to increase its production by 600,000-1 million b/d in the next 12 months. Libyan and Iranian production could also increase next year, given the right conditions.
"We're looking at the long-term interests of the organization and the members. We are looking at the stabilization of the market in the long term. We are not interested in the short-term fixes," said UAE Energy Minister Suhail al-Mazrouei.
The major side-effect of this experimental policy is the downside pressure on prices. "Yes, it is a risk, but we have no choice," said the Mideast delegate. The Gulf thinking is that prices may need to fall to test the marginal barrel of oil, in a bold departure from the group's historic mandate to balance the market. Lower prices will almost certainly put heavy pressure on Venezuela, Iran, Iraq and Libya, which are facing tough economic times.
This strategy will test the economic viability of US light, tight oil, which so far has been resistant to prices that have fallen below $80, albeit for only a short period of time. Accepting a lower price could also provide a stimulus to the global economy, which is sputtering after a raft of unexpected bad news out of Asia.
Alex Schindelar, John van Schaik and Rafiq Latta, Vienna
In Historic Move, Opec Tells Market to Stabilize Itself
Thurs, Nov 27th, 2014