Is OPEC Dead Or In Coma!

تم نشره في Mon 30 May / May 2016. 12:00 AM
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By: Leheb Ata Abdul Wahab
Iraqi Energy Economist

With the meeting of OPEC due to be held on the 2nd of June in Austrian capital, Vienna, just days ahead, the global market holds with great apprehension and anticipation for the outcome of deliberations. The big unknown is whether anything tangible will come out of it!

The Price Market: Hawks Vs Doves

Political differences related to geopolitics of the Levant region with totally opposing views —the Proxy War between its two leaders Saudi Arabia & Iran in Syria and Yemen— has split OPEC into two feuding factions:

(1) The Doves: Led by Saudi Arabia and its Arab gulf brethren (UAE, Kuwait & Qatar), adoptting a new policy. With the global markets awash in oil, the Saudis abandoned their previous Swing Producer Strategy in favour of defending its market share in lucrative Asian markets. Any suggestion of freezing production to allotted quotas standing at 30.5 million barrels per day was given the deaf ear.

Saudi Arabia has been producing at a record 10.2 million barrels a day, fending for their share of the market and flooding it with oil. This approach is starting to pay dividend with the drop in the American oil shale production —major contributor to the supply glut— as demonstrated by the drop in the oil rigs count to less than 400 rigs; its lowest counts in years.

(2) The Hawks: Led by Iran and to a lesser extent Venezuela & Algeria who prefer to see OPEC take a collective lead to cutting production and suspend the plummeting of oil prices further, at a rock bottom of USD27 per barrel by the turn of the New Year.

Accordingly, prices have recovered a bit recently, hovering around USD50 per barrel, due to factors beyond market fundamentals, primarily the fires at Alberta, Canada, undermining its production of tar sand, notwithstanding the political upheavals at the Niger delta, home of Nigeria's main oil fields.

Nonetheless, the market remains saturated with supply exceeding demand by more than one million barrels a day, and the situation was made worse by the Iranian position, refusing to abide by the Doha accord to freeze production levels, since sanctions were lifted, early January 2016.

Iran remains adamant on going forward with increasing production, now that sanctions have lifted, to its pre-sanctions level of 2012, from current levels at 3.5 million barrels a day, to its potential 4 million barrels capacity per day, by mid-2017. Any talk of freezing production seen from an Iranian point of view is put off.

OPEC Could Make History

Even though OPEC’s obituary is all over foreign media, which is nothing new; OPEC could still prove to sceptics that the Organization is alive and kicking, by arriving at a consensus among its members to cut total production —Iran exempted— in a similar fashion to that of its historical meeting at Oran, Algeria, in December 2008; when members agreed to cut production by 4.2 million barrels per day. A measure that promptly put an end to plummeting prices trading at the time at less than USD25 per barrel —consequence of the financial crisis; to recover by leaps and bounds up to more than USD100 per barrel in just couple of months.

The big question is; will OPEC follow suit?