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OPEC Delegates Start Whispering About Potential Oil Cut

November 12, 2014

A subtle shift may be taking place within OPEC as it heads into its most important meeting in years, according to delegates with the producer group, as the discussion over whether it needs to cut output to defend oil revenues quietly intensifies.

OPEC’s Secretary General Abudulla al-Badri this week urged markets not to panic over the drop in prices to a 4-year low near $81 a barrel, while Kuwait’s oil minister said OPEC was unlikely to cut output when it meets on Nov. 27 in Vienna.

But privately, more delegates within the Organization of the Petroleum Exporting Countries are starting to talk of the need for the group to take some action, although they warn that reaching an agreement will not be easy.

“It will be a serious meeting, a difficult meeting,” an OPEC delegate said. There might be an agreement to “bring production back to quota” if there is no consensus for a cut in OPEC’s output target, the delegate said.

That could involve reducing output by around 500,000 barrels per day (bpd), the amount OPEC is currently producing above its output target of 30 million bpd, according to its own figures. That could serve as a face-saving compromise between those willing and opposing a formal cut.

International oil prices have fallen by around 30 percent since June, as fast-rising U.S. shale production has contributed to growing supplies. But so far only a Libyan OPEC official, Venezuela and Ecuador have called for OPEC to cut output.

Kuwait and Iran have said a reduction is unlikely, while Saudi Arabia, the most influential member, has yet to comment publicly. Oil traders and analysts are split over whether the group will act to shore up prices. 

While many members of the group such as Ecuador, Iran, and Venezuela will face large budget shortfalls if prices stay at or below current levels, some believe the group is largely powerless in the face of rising U.S. production, which has been increasing at around 1 million bpd for the last three years.

That could leave them to compete amongst themselves for a larger slice of shrinking pie, as individual members try to hold on to market share. Others are banking that prices will recover as demand increases over the winter.

But a second OPEC delegate, asked if his country agreed with the ‘don’t panic’ message, was not convinced some countries would be willing or able to stand firm. Many fear prices would need to fall further to slow U.S. output growth, inflicting more pain on OPEC members’ budgets.

“Most people are saying that, but I am not so sure,” said the delegate, who declined to be identified by name. “Other countries, like Venezuela, have a different opinion.”

SAUDI STILL HOLDS THE KEY, BUT LIBYA EYED

With just over two weeks until the meeting in Vienna, powerful Saudi Arabia is still holding its cards close.

While Saudi delegates have quietly indicated they may be comfortable with a period of lower prices to try slow the rapid rise in U.S. oil output, some believe it is a tactic to put pressure on other OPEC countries to share in any production cut either now or in the future.

Oil minister Ali al-Naimi has not spoken publicly since September, leading some delegates from other countries to say Saudi has added to confusion in the oil market and inside OPEC. 

A third OPEC delegate, who previously did not expect a cut, took a softer line this week, saying: “I’m not sure. It is very difficult,” when asked again if the group might act.

Ed Morse, managing director and head of commodities research at Citi in New York, said it appeared the Saudis wanted to see “a concrete willingness on the part of other producers” to take part in any production cut.

Morse said a recent trip by Naimi to non-member Mexico could be an attempt to rally support for a broad-based cut from both inside and outside the group, as was arranged in the late 1990s.

Another possibility is that the group will be overtaken by events. OPEC member Libya, which saw production recover from around 100,000 bpd in June to near 900,000 bpd in September, is again gripped by political strife.

Its oil output is already slipping, down to around 500,000 bpd, potentially reducing the need for the group to agree a formal or informal output cut for now, though there has been little reaction in prices so far.

Kuwait’s oil minister Ali al-Omair said that in any case the group must present a more united front to the oil market after recent disagreements.

“The important thing is that we agree,” al-Omair said.

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