OPEC’s next meeting in Vienna is exactly one month from today. As we have previously reported, we see no reason why the Saudi-led, 12-member group will act to cut its recommended output ceiling to prop up prices, despite the urgings of several especially hard hit members for it to do so.
With US oil production showing signs of decelerating, and with OPEC producing north of the 30 M/bpd recommended ceiling, we see the December 4 meeting in Vienna as likely being marked by a maintenance of the “market share status quo.” But that doesn’t necessarily mean that the meeting auditorium in Vienna will be marked by a harmonious ambiance. In fact, recent developments indicate that lively debate could mark much of the group’s deliberations next month.
The following post seeks to bring us up to date on where OPEC collectively stands one month away from its biannual meeting.
1. OPEC Draft Report Shows Internal Division
Reuters reported on November 2, citing a draft report on OPEC’s long-term strategy (LTS), that internal debates between OPEC members are intensifying as December 4 approaches. The document reportedly contains annotations by Algeria, Iran and Iraq, as well as suggestions from Algeria and Iran, for the group to take actions to buoy prices, such as establishing a price target or floor and enacting a return to OPEC’s production quota system.
Recall that the strategic shift of OPEC towards a market share defense strategy was prompted by Saudi Arabia and its Gulf peers at the group’s November 2014 meeting and reaffirmed at the June meeting.
But throughout the past year, those OPEC members that have been especially hard hit by the plunge in oil prices have been urging the group to take action. Thus a chasm has emerged in the position of the wealthier, predominantly Gulf state OPEC members (they’re hurting too, however…see below), and others, such as Iran, Algeria, Nigeria and Venezuela, that are particularly ailing amid the bear market.
The 44-page draft document seen by Reuters indicate that the differences between the two OPEC camps related to short-term policy are informing the group’s updating of its LTS, and may engender a fractious meeting on December 4 as strategic options are assessed. “OPEC should be prepared to establish and defend a price floor, in particular, and to accept a temporary trade-off between lower market share and higher revenues,” Reuters quoted Algeria as commenting in the draft document.
The news agency quoted Iran as saying in one of its comments, “It is our recommendation to agree upon a fair and reasonable price (band) then try to support it as long as this price seems a fair and reasonable price.”
Algeria, Iraq and Iran want to include different versions of the need for OPEC to maximize revenues as one of OPEC’s first long-term objectives in the final report, Reuters reports. In their comments on the draft document, these countries said that talks among OPEC’s official representatives have not yet yielded agreements on certain key objectives.
Algeria suggested the following as an OPEC objective, as quoted by Reuters: “Maximize long-term petroleum revenue of member-countries and safeguard their interests, individually and collectively, while enhancing the role of oil in meeting future energy demand.”
Iraq suggested that OPEC’s members should determine their own policies concerning the LTS by establishing “a model for achieving maximum revenue through a balance between market share and prices,” Reuters quoted the comment as saying.
Meanwhile, Iran, which will officially inform OPEC at the meeting of its 500,000 bpd boost in oil exports at the start of next year after sanctions are eased, was quoted by Reuters as commenting, “OPEC production ceiling should be set for 6 or 12 months intervals proportionate to the estimated ‘call on OPEC’ and then allocation of production for every member country could be agreed upon.” OPEC’s 30 M/bpd output ceiling does not specify limits for the individual members of the group.
OPEC governors are convening in Vienna this week to finalize the final draft of the report, Reuters reports.
2. OPEC Is Tightening Its Own Belt
In a November 3 report, the Wall Street Journal cited OPEC officials as saying that the group has enacted a hiring freeze, decreased the number of training sessions for staff and scaled back travel. The officials added that OPEC has for now ruled out an increase in the eyarly $2.4 million fee that each member pays to be part of the organization. “We are like an oil company,” one OPEC staffer told the paper.
In addition to the aforementioned long-term strategy report being discussed this week in Vienna, officials are also discussing adjusting spending at the secretariat, the officials said.
3. Welcome, Indonesia.
Indonesia will officially rejoin OPEC at the December meeting, after having left the group 7 years ago. Indonesia left OPEC on January 1, 2009, when its membership expired. It joined the group in 1962. Its exit was prompted by growing domestic demand for energy, declining output (most notably in mature fields), and limited investment to increase capacity. Indonesia now imports crude oil and refined products to meet demand, and since the early 2000s the country has been a net oil importer.
Indonesia will be the group’s fourth-smallest producer- ahead of Libya, Ecuador and Qatar. Indonesia’s 2015 production target is 825,000 bpd- roughly half of its output peak in the early 1990s.
Indonesia was the only Asian OPEC member country for almost 50 years prior to leaving the group in early 2009 as oil prices then hit a record high, and as rising domestic demand and declining production transformed the country into a net oil importer.
4. Iran To Make Post-Sanctions Plans Official
Saudi Arabia’s chief geopolitical antagonist in the region, Iran, will make official at the meeting its plans to boost oil production by 500,000 bpd early next year, thus adding to the oversupply of the global market that has largely contributed to depressed prices.
Iranian Oil Minister Bijan Zanganeh was quoted by Shana news agency as saying during a visit to West Karoun oilfields, “During the [upcoming OPEC] meeting, we will officially notify other OPEC members of our plans to raise production and will ask them to respect the 30-million-barrel ceiling which they have agreed; besides, we will not wait for any other country for boosting our production.”
Iran seeks to boost crude production by 500,000 bpd as soon as sanctions are ended early next year and by 1 M/bpd in March.
Zanganeh said Asian markets would be Iran’s priority for exporting oil after sanctions are lifted. Shana quoted him as saying, “If we cannot sell our oil is Asia, Tehran will also consider European and South African markets.”
He added that he did not project that the addition of 500,000 bpd of Iranian oil to global markets would have any effect on oil prices.
5. Saudi Is Feeling The Pinch…
In its October Middle East and Central Asia Regional Economic Outlook, the IMF said Saudi Arabia, the largest economy in the Arab world, could be depleted of the financial assets required to support spending within five years if the government maintains existing policies. The Saudi deficit could increase to more than 20% this year following King Salman’s decision to provide one-time bonuses for public-sector employees after his accession to the throne early this year, the agency added.
And at the start of November, Standard & Poor’s cut Saudi’s credit rating one notch to A+, the fifth-highest classification, as it said Saudi’s deficit will increase to 16% of GDP in 2015. The credit outlook of OPEC’s biggest producer is negative as the drop in oil prices over the last year has rendered it challenging to reverse the fiscal deterioration, the ratings agency said in a statement.
The growing deficit and a high dependence on oil revenue “point to vulnerabilities in Saudi Arabia’s public finances,” the S&P said. It is important to emphasize, however, that Saudi’s public debt is one of the lowest in the world, with a gross debt-to-GDP ratio of less than 2% last year.
In response to the S&P’s downgrade, the Saudi Finance Ministry said “strongly disagrees with S&P’s approach to ratings management in this particular instance.” Further, the credit rating cut was “driven by fluid market factors rather than changes in the fundamentals of the sovereign,” which “remain strong,” the ministry said in a statement on Saudi Press Agency’s website.
Earlier this week, Bank of America Merrill Lynch said that Saudi confronts an “elevated” risk of another credit rating cut by Standard & Poor’s as the country continues to struggle with low oil prices. In an emailed report sent to Bloomberg, Bank of America’s Merrill Lynch’s Middle East and North Africa economist, Jean-Michel Saliba, said, “Based on planned fiscal consolidation measures, we think the risk of another downgrade” is elevated. He added S&P’s projection of a budget deficit of 10% of economic output in 2016 and 5% in 2018 is optimistic.
6. …As Is The Broader MENA Region
In the broader MENA region, “Intensifying conflicts and depressed oil prices are weakening growth prospects and raising risks across the region, a situation compounded by the recent bout of global financial market volatility.”
Overall, the IMF projects 2015 growth in the Middle East, North Africa, Afghanistan and Pakistan (MENAP) region to be 2.5%, down from 2.7% growth in 2014 and down 0.5% from the agency’s May forecast.
The monthly report said that “the near-term outlook for the MENAP region is dominated by geopolitical and oil price developments…Regional uncertainties arising from the complex conflicts in Iraq, Libya, Syria, and Yemen are weighing on confidence,” while “low oil prices are also taking a toll on economic activity in the oil-exporting countries.”(Source: Oilpro.com)