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.