Opec has abandoned all pretence of acting as a cartel. It's now every member for itself. At a chaotic meeting Friday in Vienna that was expected to last four hours but extended to nearly seven, the Organisation of Petroleum Exporting Countries tossed aside the idea of limiting production to control prices.
Instead, it went all in for the one-year-old Saudi Arabia-led policy of pumping, pumping, pumping until rivals – external and internal –such as Russia and US shale drillers, are squeezed out of market share.
“Lots of people said that Opec was dead; Opec itself just confirmed it,” Jamie Webster, a Washington-based oil analyst for IHS said in Vienna.
Opec has set a production target almost without interruption since 1982, though member countries often ignored it and pumped well above it. The ceiling of 30 million barrels a day, in place since 2011 and now abandoned as too rigid, is no exception.
Opec output has outstripped it for 18 consecutive months, according to data . Now the organisation says it will keep pumping as much as it does now – about 31.5 million barrels a day – effectively endorsing limitless output.
The oversupply has sent the price of Brent, a global oil benchmark, to a six-year low, triggering the worst slump in the energy sector since the 2008 world financial crisis.
It's cut the profits of major oil companies such as Exxon Mobil and BP in half while crude-rich countries such as Mexico and Russia have watched their currencies plunge and their coffers shrink.
West Texas Intermediate extended losses below $40 a barrel, dropping as much as 81 cents, or 2 per cent, to $39.16 on the New York Mercantile Exchange on Monday. Brent crude in London slid as much as 1.3 per cent to $42.46.
Production target
On Friday, there was no talk of even setting a production target that member countries could then disregard. “Effectively, it’s ceilingless,” said Iranian oil minister Bijan Namdar Zanganeh. “Everyone does whatever they want.” Emmanuel Ibe Kachikwu, the Nigerian minister, reinforced the message, saying the market shouldn’t worry about the “semantics” of targets or real production. “We aren’t going to go back to a cartel and work against the customers – that time has passed,” said United Arab Emirates minister Suhail Al Mazrouei. Most of the market “doesn’t have any ceiling,” Iraqi oil minister Adel Abdul Mahdi said.
“Americans don’t have any ceiling. Russians don’t have any ceiling. Why should Opec have a ceiling?”
The prospect of Opec, which accounts for roughly 40 per cent of the world’s oil production, taking US TV personality Sarah Palin’s advice to “drill, baby, drill” sent crude prices further downward.
The US benchmark dropped 5.7 per cent between 8:14am and 9:06 am on Friday. On June 30th, 2014, the price was $105.37 a barrel.
The oversupply is likely to continue in the new year. Iran, for years under sanctions related to its nuclear program, has promised to lift its production to as much as 4 million barrels a day by the end of 2016, up from about 3.3 million barrels a day currently.
“We hope an increase in oil-market demand, on one hand, and a dropping trend in production or drop in the increase in production, as seen and said by non-Opec producers, will exert less pressure on prices,” Iran’s Zanganeh said.
Opec will “continue its pivotal role in production and investment no matter how much prices fall,” Saudi Arabian oil minister Ali al-Naimi said in an interview . The meeting on Friday at times looked as if it might be headed to an acrimonious end, similar to a gathering in June 2011 when Opec was unable to agree on policy and ministers openly attacked each other.
‘Worst meeting’
At the time, Nr al-Naimi said he personally had had one of his “worst-ever” meetings. No official would go that far to describe this conference, yet when ministers and delegates left the Opec building, near the iconic Vienna State Opera house, they were speechless and grim.
Within an hour, some of them, including representatives of Saudi Arabia and Iran, were heading to the airport. Mr Al-Naimi said he was traveling to Paris to take part in climate-change talks. Delegates from Venezuela, which pushed hard to cut the old ceiling by about five per cent, would only say Opec "didn't decide anything," a sign of the deep frustration with the new policies in the cash-strapped South American country.
Officials nonetheless did their best to conceal any division. Asked what arguments, if any, went on inside the small meeting room where Opec ministers seclude themselves without the presence of aides, Iran’s Mr Zanganeh simply said, “There were discussions.” That was most likely polite understatement, as Iran’s rival, Saudi Arabia, carried the day.
This time around, Opec didn’t look like the group that American diplomat Henry Kissinger once described as able to blackmail national economies and whole industries. Instead, it looked like they might have spent the last few days bullying each other.
– Bloomberg
