Wealthy Nations Daily Update - OPEC

Tomorrow sees the 168th OPEC meeting, in Vienna, Austria; this will probably be a somewhat contentious meeting with production policy high up on the agenda. Established in Iraq 55 years ago, the group’s mandate is to “coordinate and unify the petroleum policies”. Now made up of 12 members, it is becoming increasingly obvious that interests and goals have diverged.

A year ago the cartel, led by Saudi Arabia, called for members to open their taps in an attempt to defend their market share against the new kids on the block; i.e. high-cost shale producers. This has resulted in a divide between the more wealthy members - who can withstand sustained lower oil price levels i.e. the Persian Gulf contingent - and high cost producers, the likes of Venezuela and Algeria, whose economies have been dragged down by the resulting price slump. Next we have the up-and-coming oil producers, Iran and Iraq - the unlikely allies in the supply glut saga - as neither wish to restrain their own production, but are calling for larger producers to cut. Iran, previously OPEC’s second largest producer plans to pump ~1 million bpd within the first six months of the sanctions being lifted. Iraq on the other hand has been producing an additional 500,000 bpd this year, and as such is the fastest contributor to OPEC’s supply growth. Libya is the obvious underdog as civil war has destroyed the country’s ability to pump as much as it has done in the past, and its economy has become increasingly reliant on income from oil. Meanwhile, Nigeria is calling for the group to cut output as it pushes for oil prices to reflect the cartel’s average cost of production. Not forgetting Indonesia’s re-entry on Friday, after a seven year hiatus, expected to contribute another ~0.9 million bpd (which will need to be accommodated into the cartel’s output ceiling of 30m bpd). But Indonesia remains a net importer of oil, and therefore has a vested interest in maintaining low oil prices.

Going by the unrelenting crawl lower of oil prices this week, it appears that the market is preparing itself for kingpin Saudi Arabia to stick to its guns and maintain its market share. There has however been a small bounce in prices today after the claims that Saudi Arabia is willing to cut production by 1m bpd next year, on the condition that other OPEC and non-OPEC producers follow suit. However, according to a Gulf OPEC source, “It is very difficult to cut one million bpd collectively… No cut without cooperation”. There were the obvious reactions from the Iran and Iraq camps, and it is highly unlikely that the likes of non-OPEC energy giant Russia will agree.

With oil prices floating near 2009 levels, and weakening balance sheets amongst the mix of oil exporters, it’s anyone's guess what will be decided at the meeting tomorrow. We suspect that Saudi Arabia - with its masses of oil and fx reserves - will be willing to withstand the short-term pain of lower oil prices; then gauge how Iran’s re-entry will affect production levels and see if shale-oil funding can be further eroded.

Meanwhile, China, the world’s largest net oil importer - which accounts for ~40% of world oil consumption growth - has been spoilt for choice. Despite its economy softening as it enters the new normal, oil demand remains robust and as such Beijing has taken advantage of the lower oil prices by agreeing on loan-for-(discounted)oil deals with countries such as western-sanctioned Russia. According to Platts China Oil Analytics, China’s oil demand rose to 11m bpd; the agency calculates the country’s demand for oil will rise ~5.6% yoy in 2015.

Please read this important information before proceeding. It contains legal and regulatory notices relevant to the information on this site.

This website provides information about Stratton Street Capital LLP ("Stratton Street"). Stratton Street is authorised and regulated by the UK's Financial Conduct Authority. The content of this website has been prepared by Stratton Street from its records and is believed to be accurate but we do not accept any liability or responsibility in respect of the information of any views expressed herein. The information, material and content provided in the pages of this website may be changed at any time by us. Information on this website may be out of date and may not be updated or removed.

The website is provided for the main purpose of providing generic information on Stratton Street and on our investment philosophy for the use of financial professionals in the United Kingdom that qualify as Professional Clients or Eligible Counterparties under the rules of the United Kingdom Financial Conduct Authority (the "FCA"). The information in this website is not intended for the use of and should not be relied on by any person who would qualify as a Retail Client. Products and services referred to on this website are offered only at times when, and in jurisdictions where, they may be lawfully offered. The information on this website is not directed to any person in the United States. The provision of the information on this website does not constitute an offer to purchase securities to any person in the United States (other than a professional fiduciary acting for the account of a non-U.S person) or to any U.S. person as such term is defined under the Securities Act of 1933, as amended.

The website is not intended to offer investors the opportunity to invest in any Alternative Investment Fund ("AIF") product. The AIFs managed by Stratton Street are not being marketed in the European Economic Area ("EEA") and any eligible potential investor from the EEA who wishes to obtain information on the AIFs will only be provided with materials upon receipt by Stratton Street of an appropriate reverse solicitation request in accordance with the requirements of the EU Alternative Investment Fund Managers Directive ("AIFMD") and national law in their home jurisdiction. By proceeding you confirm that you are not accessing this website in the context of a potential investment by an EEA investor in the AIFs managed by Stratton Street and that you have read, understood and agree to these terms.

No information contained in this website should be deemed to constitute the provision of financial, investment or other professional advice in any way. The website should not be relied upon as including sufficient information to support any investment decision. If you are in doubt as to the appropriate course of action we recommend that you consult your own independent financial adviser, stockbroker, solicitor, accountant or other professional adviser. Past performance is not necessarily a guide to the future. The value of investments and the income from them may go down as well as up. An application for any investment or service referred to on this site may only be made on the basis of the offer document, key features, prospectus or other applicable terms relating to the specific investment or service.

Where we provide hypertext links to other locations on the Internet, we do so for information purposes only. We are not responsible for the content of any other websites or pages linked to or linking to this website. We have not verified the content of any such websites. Such websites may contain products and services that are not authorised in your jurisdiction. Following links to any other websites or pages shall be at your own risk and we shall not be responsible or liable for any damages or in other way in connection with linking.

By using this site, you should be aware that we may disclose any information that we hold about you to any regulatory authority to which we are subject, or to any person legally empowered to require such information.

This website uses cookies to improve user experience, by clicking the "I Accept" button below means you consent to the use of cookies on our website.