OPEC Decide to Maintain 30 M-bpd Production Quota
There may be a global oil glut, but OPEC is not going to do anything about it. For the second time in just six months, the Organization of Petroleum Exporting Countries decided to leave its collective oil output at 30 million barrels a day.
Production Ceiling Is Really an “Indicator”
In effect, OPEC has decided that its role has changed as United States shale oil production continues to flood the market. OPEC can no longer change world oil prices by cutting back on its own production. One year ago, world oil prices were around US $116 per barrel. Today they hover around US $63, with little likelihood of any rise beyond US $70.
However, the OPEC decision is also a message to its members that they can pump as much oil as they like. The 30 million barrels a day official ceiling is really more of an “indicator” than a target, said OPEC Secretary General Abdallah Salem el-Badri.
U.S. Shale Oil Output Still High
Despite low oil prices, U.S. shale oil production remains high. The Paris-based International Energy Agency (IEA) believes that U.S. production will begin to drop off sharply from July. According to the U.S. Energy Information Administration, total U.S. oil production reached 9.6 million barrels a day in May, but this is expected to decline to 9.3 million barrels a day by 2016.
In mid-June oil prices did rally to over US $64 in response to the evolving Greek debt crisis and increasing transportation demand as the summer holiday season unfolds. But global oil demand is still spluttering as economic troubles persist in China as well as Europe. The consequence is that much of the oil production is being directed into storage.
Strategy Driven by Arab Gulf Countries
The main drivers of OPEC’s current strategy are the Arab Gulf countries. Saudi Arabia has decided to maximise its output in a fight for market share against all competition, despite the financial problems this inflicts on weaker OPEC members such as Venezuela, Algeria, Nigeria and Iran. These four countries did push for a production cut at OPEC’s November 2015 meeting but had to acquiesce to the existing OPEC strategy at the early June meeting.
Any Saudi strategy to curtail U.S. production is doomed to long-term failure. U.S. producers have been cutting back on drilling, with attendant rig count falls and job losses. But they are also becoming more efficient and will be able to mobilise back into drilling action once prices recover sufficiently.
No Big Iranian Output Rise Likely
There is also some nervousness about any forthcoming deal between Iran and the U.S. on Iran’s controversial nuclear programme. The expectation is that Iran may add a further one million barrels a day on to the world oil market if United Nations sanctions are eased or removed. Other analysts question this given the technical difficulties Iran will face when attempting to increase its oil production. Any output increase is likely to be in the region of about 300,000 barrels a day at best.
With all these woes, it came as a surprise that Indonesia wants to return to OPEC. The country joined OPEC in 1962 and quit in 2008 when faced with declining domestic oil production and investment. Now it has to import oil to meet domestic demand and hopes that OPEC membership will strengthen its new role as a special customer of fellow member states.
Renewed membership will also give Indonesian politicians a bigger platform on which to appear on the world stage. This is why Ecuador restored its OPEC membership in 2007 after quitting the organisation in 1992.