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Opec to stay the course despite fears of US$20 oil

After defending the interests of oil-exporting nations for five decades, Opec has made a surprising choice with its newest member: a country that consumes about twice as much crude as it pumps.

[LONDON] OPEC is determined to keep pumping oil vigorously despite the resulting financial strain even on the policy's chief architect, Saudi Arabia, alarming weaker members who fear prices may slump further towards US$20.

Any policy U-turn would be possible only if large producers outside the exporters' group, notably Russia, were to join coordinated output cuts. While Moscow may consult Opec oil ministers before their six-monthly meeting next week, the chances of it helping to halt the price slide remain slim.

"Unless non-Opec say they are willing to help, I think there will be no change," said a delegate from a major Opec producer.

"Opec will not cut alone."

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When the exporters' group last met in Vienna in June, Saudi oil minister Ali al-Naimi and those from other wealthy Gulf states could barely hide their jubilation.

Opec's historic decision in November 2014 - to pump more oil and defend its market share against surging rival suppliers - was working, they proclaimed as crude traded near US$65 per barrel. Six months later, it has hit US$45, down from as much as US$115 in the middle of last year.

Now some member states are talking about a return to twenty-dollar-oil, last seen at the turn of the millennium. They point to Iranian confidence that international sanctions on its economy will be lifted by the end of the year. "Iran is announcing its production is going to increase as soon as they lift the sanctions and we need to do something. We (Opec) cannot allow going into a war of prices. We need to stabilise the market," Venezuelan oil minister Eulogio del Pino said on Sunday.

Asked how low prices could go next year if Opec failed to change course, he said: "Mid-20s." Goldman Sachs said this year it saw a possibility of crude going even below US$20 because of the huge global oversupply, a strong dollar and a slowing Chinese economy.

Most analysts doubt the Iranian sanctions will be lifted before next spring under its nuclear deal with world powers, but sooner or later its output will rise.

Already the collapse in prices has partly achieved Opec's goals. It has boosted global demand and curbed growth in supplies of US shale oil, which is relatively expensive to produce. Non-Opec supply is also expected to fall for the first time in almost a decade next year as struggling producers cut back on capital spending.

But the world is still producing much more oil than it needs. Russian output has unexpectedly set new records and global stocks are ballooning.

Even the finances of Saudi Arabia, which led Opec's policy shift, are under more strain. Standard & Poor's rating agency forecasts its budget deficit will rocket to 16 per cent of GDP in 2015 from 1.5 per cent in 2014.

Riyadh describes this year's deficit as manageable. However, Bank of America Merrill Lynch said on Monday it believed the pressure was so high that the Saudi government would be forced either to devalue its dollar-pegged currency or cut oil output.

Such a cut would mean executing an about-face that many rivals would interpret as a strategy failure. Keeping the taps open while hoping for a longer-term payoff still appears to be the choice of Riyadh and its wealthy Gulf allies - Qatar, the United Arab Emirates and Kuwait.