Opec meets on Friday in Vienna to discuss a glutted oil market, but there seems little prospect for reaching an agreement to stabilise oil prices.
Commercial inventories in the Organisation for Economic Co-operation and Development have now breached the record 3 billion barrel mark, supply is about 1 million barrels per day above worldwide demand at a time when inventories are normally drawn, and further Iranian volumes will add fuel to the fire next year when trade sanctions are lifted. Libya could also add 440,000 bpd if two fields come back on stream this month.
Opec producers are competitively discounting to increase market share and the Opec Reference Price (ORP) is actually now only $38-$39 per barrel. Usually the ORP lies between Brent and WTI, but aggressive pricing by Opec countries has reversed the ORP-WTI differential and driven the Opec basket of crudes well below WTI, which closed last week at $41.74 per barrel.
Saudi Arabia cut its December formulas across the board and other producers responded by offering further discounts. Basrah Heavy, being given in increasing quantities by Iraq to supermajors redeveloping its fields in lieu of missed cash payments, is now just over $33 per barrel, and its differential against Saudi Heavy has widened by more than $2.50 per barrel since the spring. Iran also increased its discounts across the board for this month to keep its oil flowing.
Qatar Land was pegged at about $1.55 below Abu Dhabi Murban, a similar crude, which last year traded at a differential of about 40 cents to the Qatari grade. Kuwait has also widened its discounts against similar Saudi crudes to keep its customers interested.
With the expanded US supply of light shale oil, Nigeria has been forced to discount its premium grades to attract other buyers. The same is true in Angola and across the world with all light crudes.
All the price slashing has pushed the Opec basket to $6-$7 beneath London-traded Brent, whereas the differential averaged $2-$3 per barrel the previous four years. Clearly the aggressive pricing has originated within Opec under an initiative to reverse the 5 million bpd output gain made by non-Opec producers during the 2010-15 period.
According to the International Energy Agency (IEA), even after demand growth next year, the call on Opec oil will be only 31.3 million bpd, compared with current Opec production of 31.8 million bpd.
Adding to the glut next year will be 500,000 bpd of extra flows, which the Iranian minister of petroleum Bijan Zangeneh says he can sell as soon as the UN sanctions are lifted.
Despite the crash in prices from the $115 peak last year, non-Opec supply has been slow to respond. US crude production has eased by 500,000 bpd during the past six months, with losses for shale oils in some basins, but the IEA forecasts that non-Opec supply will only cease growing at the end of the decade, after gaining another 1 million bpd during the 2015-20 period.
This will leave most of the roughly 1 million bpd anticipated annual growth in world demand to Opec, but this year Iraq has taken most of this by boosting its output by 800,000 to 1 million bpd.
Saudi crude production is up by about 500,000 bpd, compared with last year, as the kingdom seeks to restore lost market share in exports over the 2012-14 interval.
There is always the possibility that slashed revenues might galvanise Opec to collective action at the forthcoming meeting. This happened when people least expected it in August 1986, when Riyadh and Tehran agreed to stabilise the market when oil prices had plunged to $8 per barrel.
A week ago, a hint from the Saudi oil minister Ali Al Naimi that the kingdom is willing to cooperate with Opec and other producers was enough to lift the market by more than $1 per barrel.
But prices then continued their decline when buyers reflected on the challenges in getting a disparate group of producers to implement cuts.
Who is going to turn away existing customers when Iran is waiting in the wings with extra supply? Output cuts would have to be substantial to accommodate Tehran and slice another 1.5 million to 2 million bpd from supply ahead of a typical spring inventory draw.
An accord is made even more difficult by the political tensions between Arab Gulf countries and Iran over Yemen and about other conflicts. Saudi Arabia insists that Russia, too, must contribute cuts to any stabilisation effort and there are now political differences here with Russia supporting the governments in Tehran, Baghdad and Syria.
With electric vehicles ascending – Toyota, for example, has said it hopes to phase out petrol and diesel cars almost entirely by 2050 – Riyadh and other Opec capitals were concerned last year that huge oil reserves might simply be left in the ground if a more muscular stance on expanding market share is not taken. With this sort of thing in the back of their minds, Gulf countries became reluctant to mark time on production rates while the rest of the world, especially the US, expanded production vigorously.
The market will pause ahead of Friday’s Vienna session, not wanting to be caught out either way. But it seems increasingly likely there will be no accord. If so, prices will again be under severe pressure.
The Venezuelan oil minister, Eulogio Del Pino, warned that the market could dip to the $20s if Opec does nothing at this week’s meeting.
Although this remark was aimed at frightening other producers into cooperating, Mr Del Pino may well end up being right.
Jim Crawford is managing director at the UAE-based Inter Emirates General Trading Company
business@thenational.ae
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