Technical experts of the Organization of Petroleum Exporting Countries (OPEC) had a meeting on October 21, 2015, in Vienna to discuss the current situation of the steady reduction in crude oil prices in the world markets. The OPEC had invited eight non-OPEC oil-producer countries to take part at the expert group meeting, including Azerbaijan, Brazil, Colombia, Kazakhstan, Norway, Mexico, Oman, and Russia. However, only five non-OPEC countries (Mexico, Russia, Colombia, Kazakhstan, and Brazil) sent their representatives to Vienna meeting. It should be admitted that another meeting was held in May 2015, but the parties failed to achieve a cooperation to build up a common strategy in oil prices.
The main purpose of the October meeting was to accept a price band by adopting a floor around $70-88 per barrel with a possible future growth of $100 per barrel. This proposal was made by the Minister of Petroleum and Mining of Venezuela, Eulogio del Pino, and it totally corresponds to the strategies of non-Gulf OPEC countries, which have been suffering from low oil prices. It is obvious that Venezuela, Nigeria, Algeria and several other OPEC countries need oil prices to be over $100 per barrel in order to cover their costs. According to the Venezuelan position on the oil price targeting, presented by the President of Venezuela, Nicolas Maduro, the average price of crude oil should be at least $88 per barrel. However, due to oversupply and low global demand, Venezuela’s 2016 budget proposal has already been based on the oil price at $40 per barrel. Therefore, Eulogio del Pino suggested OPEC and non-OPEC countries make cooperation to support prices by both reviving OPEC’s price band and pushing OPEC and non-OPEC countries to reduce oil production.
For instance, the Head of the Venezuelan Ministry of Petroleum and Mining personally dealt with the lists of invitees, especially, for non-OPEC countries in order to achieve broader participation in the event. However, he could not manage to attract the participation of high-ranked officials to the meeting. Most of the representatives of the OPEC countries were low-ranked officials except the Minister of Non-Renewable Natural Resources of Ecuador. Therefore, the national experts could not have the necessary majority to start negotiations on reducing oil production. As a result, the OPEC and non-OPEC countries did not even touch upon the issue of oil cuts and had to focus only on discussing the oil markets prospects.
Appropriate conditions for starting negotiations on oil cuts could appear during the forthcoming OPEC Summit, which will be held on November 27, 2015. However, the possible high-ranked dialogue platform cannot guarantee that the Gulf-OPEC countries will change their oil production strategy. Actually, the OPEC countries in the Middle East concentrate on protecting their share in the global oil market. Therefore, they will continue to increase the oil production in order to compete with the shale producers in North America. Namely, according to the latest monthly market report of the OPEC, the production by the OPEC countries increased by 109,000 barrels per day for an average 31.6 million bpd in September 2015. These figures clearly show that the Gulf-OPEC countries have been worried about losing future contracts with main oil importers rather than keeping oil prices high.
Previously, the policy of supply cuts was a typical tool for boosting prices among the OPEC countries. However, when the world supplies outpace demand by around 2 million bpd, it could be useless to implement the policy of supply-cuts among the OPEC countries without assistance from non-OPEC producers. In addition, the economies of both sides have been affected negatively during the period of oversupply.
According to the International Monetary Fund (IMF) forecasts, this year, Saudi Arabia’s government will run a budget deficit around 19.5% of gross domestic product (GDP), compared with a deficit of 3.4% of GDP last year. Moreover, there would be also a decline in the GDP growth from 3.5% in 2014 to 3.4% in 2015. The economy of the largest oil producer among non-OPEC countries, Russia, has been hit even more dramatically. The oil price slump, coupled with Western sanctions and weakening of the national currency, has already pushed the country into a recession. According to the IMF, the GDP growth is expected to be over -3.8% in 2015 comparing 0.6% in 2014.
It is worth mentioning that a strategy to protect market share, rather than a strategy to cut output to prop up prices as OPEC did in the past could be effective in a short-term, but at the same time, it does not correspond to the long-term strategy of the OPEC. Currently, the OPEC countries have prepared an internal report, which again showed the increase in disputes involving the need to support a fair oil price and boost public revenues. This report includes annotations by Iran, Algeria and Iraq, and suggestions from Iran and Algeria including measures to support prices by a price target or a price floor and a return to OPEC quota system.
For instance, in its comments Iran, which is preparing to boost exports and regain its market share after sanctions are lifted, strongly recommended to restore the OPEC quota system which was left in 2011. Mentioning that some of the OPEC countries have enhanced their production rate without paying attention to the production ceiling, which should be over 30 million bpd, there is a need to specify quotas for the individual members. As a suggestion, Tehran proposed to set the OPEC production ceiling for 6 or 12 months intervals. Therefore, Iran demonstrates its desire to revisit the quota system to make production management as realistic and equitable as possible.
A decision to restore OPEC’s quota system could be determined only by the Ministers during the meeting, which is planning to be held on December 4, 2015. Consequently, it could be predicted that in the next Ministers meeting, no progress is expected on dealing with the mounting over-supply that has brought prices to six-year lows. In addition, non-OPEC countries have already indicated that they refused to cooperate with OPEC countries in cutting oil supply to reduce a surplus that has prompted oil prices. In these circumstances, it seems that there would be no recovery in oil prices in 2016 if the countries continue to maintain their current oil production levels.