OPEC Meet as Barrel Prices Drop
Tentative hopes of oil production cutbacks by OPEC member states after its November 25 meeting in Vienna are emerging as the group’s members hold talks with non-OPEC oil producers.
Originally scheduled for November 27 in Caracas, the meeting was moved forward by two days and to Vienna at Venezuela’s request.
Benchmark contract oil prices for December deliveries on either side of the Atlantic slumped to their lowest levels in four years. January Brent prices in London fell to US $78.47 per barrel before rebounding some hours later to US $79.29 per barrel as news of meetings and potential cuts spread. December crude prices in New York remained at US $74.62 per barrels.
Price Slumps by Nearly One Third
World oil prices have slumped by almost a third since their June 2014 peak of US $115 per barrel. OPEC usually calls a meeting to adjust oil production levels and prices when the world price falls between 15% and 20%. This time crude oil futures slumped to a low as leading OPEC producer Saudi Arabia pushed its own oil output to expand its share of the OPEC market.
The Saudi production increase coincided with booming production levels of US shale oil. Although representatives from Libya, Iran and Iraq have met with Saudi King Abdullah in an effort to persuade him to cut oil production, their pleas fell on deaf ears. Nevertheless, Saudi Arabia’s plans for an expanding market share in Asia are not guaranteed to succeed. China has been buying more crude from Colombia over recent months and cutting back on Saudi purchases.
Looking to Non-OPEC Producers
Venezuela has been seeking help from non-OPEC producers such as Mexico and Russia. Russia’s deputy prime minister and Rosneft CEO Igor Sechin, a close ally of Vladimir Putin, will attend the OPEC meeting.
But commodity analysts see little chance of non-OPEC countries coming to OPEC’s rescue if the Saudi’s do not cut their own production.
There is also the problem about OPEC’s real control of the oil market. Although OPEC accounts for around 40% of global oil production and 60% of crude oil traded globally, this production is mostly from government-owned or government-controlled oil companies whose real role is to fund government budgets.
Production Costs and Government Takes
Saudi Arabia’s persistent oil production increases could cause serious economic problem for Iran and Russia as well as curb the Iranian nuclear programme. Although the production costs for Canadian oil sands and U.S. shale oil are comparable with those of Russian and Iran oil at around US $35 to US $40 per barrel, the privately produced unconventional oil attracts a government tax take of just US $5 to US $6 per barrel. Russia and Iran need oil prices at between US $105 to US $115 per barrel to stay afloat economically, while North American shale oil and oil sand producers need a price of just US $65 to US $73 per barrel. These costs will fall further, by at least US $8 per barrel, once new oil transportation pipelines between Canada and the US open for business.
Gulf Producer Advantages
Saudi Arabia and Kuwait have lower oil production costs because of benign geology and close export facilities and so break even with oil prices around US $75 per barrel.
However, if OPEC does not cut back on production, oil prices could fall to US $40 per barrel. Some analysts suggest that this would affect the financing requirements of OPEC members even more seriously that an output cut.