OPEC Leaves Production Target Unchanged
November 27, 2014
VIENNA—OPEC members rejected calls for drastic action to cut their oil output, keeping their production ceiling unchanged and
suggesting the cartel is bracing for lower prices longer term. The decision on Thursday sent crude prices into a tailspin and spilled
into currency and European stock markets. If Thursday’s market rout proves lasting, it will provide more relief to consumers in
gasoline-guzzling countries like the U.S. But it is hammering the finances of big oil producers, from Russia to Venezuela, and biting
into profit at oil companies big and small. The 12-member Organization of the Petroleum Exporting Countries, who collectively pump
more than one-third of the world’s oil, agreed at their meeting in at OPEC Headquarters in Vienna, Austria to stick to the group’s
current target of producing 30 million barrels a day.
Since the cartel is currently pumping more than its ceiling, the decision—
backed by a commitment from OPEC members to comply with it—
implies a cut of around 300,000 barrels a day, based on OPEC’s own
figures. That would put only a relatively small dent in global oil supply
even if implemented, and the group has exceeded its ceilings most
quarters since late 2011.
The decision sent oil prices tumbling, with the West Texas Intermediate
benchmark falling below $70 a barrel for the first time in more than four
years. Oil for January delivery fell $4.64, or 6.3%, to $69.05 a barrel as
electronic trading in New York on Thursday, November 27th.
OPEC Secretary-General Abdalla Salem el-Badri said he was sure OPEC
members would “abide by” the group’s production target. Speaking to
reporters, Venezuela’s foreign minister Rafael Ramirez said the rollover
was “the first step…to reduce our production,” a view that was echoed by
Gulf delegates. But faced with a gusher of new oil supply—mainly from
the U.S. thanks to the shale revolution—and weaker global oil demand,
OPEC’s muted response caused some to question the five-decade old
cartel’s relevance. Analysts had estimated OPEC would need to take 1
million to 1.5 million barrels a day off the market to support oil prices, which have fallen by more than 30% since the summer. (Oil in
the Persian Gulf is much easier and cheaper to extract. Since OPEC’s formation in 1972 Saudi Arabia with its wealth and largest
reserves has been the “swing producer” able to increase or decrease supply at minimal additional internal cost, and thus able to
influence prices and balance the markets. - Editor)
“The outcome of today’s meeting marks a watershed for the oil market, OPEC is clearly signaling that it will no longer bear the
burden of market adjustment alone and this decision puts the onus on other producers, especially U.S. tight oil, to adjust as well,” oil
analysts at Barclays said. The absence of stronger OPEC action makes a rebound in oil prices less probable, putting more strain on oilproducing countries which became used to oil prices above $100 a barrel for much of the time since early 2011. Among OPEC’s
members, only Qatar and Kuwait will be able to balance their budgets next year with
Worldwide oil prices
prices at their current level.
are always quoted in
42 gallon barrels (bbl).
OPEC Meeting: What’s at Stake?
The biggest losers from the current price trend could include Russia, which is already
suffering from an economic slowdown and feeling the effects of both lower oil revenues and Western sanctions imposed because of
the Ukraine conflict. But the drop in prices has helped consumers in developed countries such as the U.S. heading into the holiday
shopping season. Lower prices at the pump and on heating bills give consumers more money for discretionary items such as restaurant
meals, electronics and haircuts. The decline in gas prices over the last six months is equivalent to a $75 billion tax cut in the U.S., said
economists at Goldman Sachs in research published Wednesday. Falling fuel prices also reduce production and shipping costs for an
array of U.S. manufacturers, farmers and businesses. “The benefit to the economy is quite significant,” said Joseph Carson, economist
at Alliance Bernstein. That windfall also accrues over time. “It’s accumulating every one or two weeks that you go to the pump.” he
said. The national average for regular gasoline fell to a four-year low of nearly $2.80 a gallon on Thursday, according to auto club
AAA. Gas prices were as high as $3.68 at the end of June.
Cheaper oil is a rare piece of good news too for Europe’s biggest economic bloc, the euro currency area, since the region is a big oil
importer. Lower oil prices, though slightly offset by the euro’s weakening against the dollar, should boost the spending power of
Europe’s consumers, still suffering from high unemployment amid the eurozone’s long slump. Dwindling oil prices could complicate
life for the European Central Bank, however, because they could drag inflation even further below the ECB’s target of just under 2%.
The ECB is already struggling to lift inflation expectations, which could fall further along with oil and other energy prices.
Many of Asia’s emerging economies are also oil importers and thus stand to benefit. Falling oil prices are “a real boon for some
countries in Asia, including India, which has a fragile current-account situation,” says Eric Chaney, global chief economist at AXA
Group in Paris.
OPEC’s relative inaction, meanwhile, leaves the oil industry, particularly U.S. producers, “in this waiting game, like a game of
chicken,” said Nasdaq energy analyst Tamar Essner. In Canada, industry officials said the slide in prices wouldn’t likely lead to
immediate production costs. Suncor Energy Inc., Canada’s largest oil sands producer, still expects crude to recover to “the $90 to $100
range,” chief executive Steve Williams said.
OPEC
Organization of the Petroleum
Exporting Countries is an
international organization and
economic cartel whose mission is to
coordinate the policies of the oilproducing countries. The goal is to
secure a steady income to the 12
member states and to collaborate in
influencing world oil prices through
economic means.
Iran
Iraq
Kuwait
Venezuela
Saudi Arabia
Algeria
Nigeria
Qatar
Angola
Ecuador
Libya
United Arab Emirates
It remains unclear how OPEC will now enforce its own production limit. OPEC has
exceeded its 30 million barrels a day target most quarters since it was announced in
December 2011 through 2013. Its production this year through October averaged 30.1
million barrels a day, based on data from the International Energy Agency.
OPEC’s production target rollover is a compromise solution designed to meet the
conflicting pressures on its members. Though OPEC has been through periods of
intense infighting, longtime observers say the group has rarely been as divided as
during the weeks running up to Thursday’s meeting.
While most OPEC countries want to see global oil supply reduced to help boost prices,
most individual members have been unwilling to cut their own production for fear of
losing crucial oil-related income and market share. Algeria and Venezuela said they
would cut their own production if a collective cut is agreed. Another problem for
OPEC is that if it were to cut production sharply, resulting higher oil prices might only
help incentivize yet more production from U.S. shale oil leading OPEC to lose more of
its share of global markets. Iraq’s oil minister Adel Abdul-Mehdi said OPEC was left
with little choice but to maintain its production target, saying a deeper cut might not
raise prices and could result in countries losing market share.
A dispute between OPEC’s Gulf state members and Venezuela caused Thursday’s
meeting to last longer than normal, delegates said.
Venezuela, which will need oil prices at $117.50 a barrel to balance its government
budget next year according to Deutsche Bank, proposed a sharp output cut, according
to people familiar with the meeting. Beforehand its representative Mr. Ramirez told
reporters he wanted two million barrels a day of oversupply out of the market.
That idea was aggressively opposed by OPEC’s Gulf members, led by the group’s largest producer, Saudi Arabia, which has sought to
maintain its market share—a third of OPEC’s total production—by cutting prices in recent months. “The cause of oversupply is not
OPEC, it is shale oil,” said one Gulf oil official, who said that Venezuela eventually backed down. Mr. Ramirez couldn’t be reached
for comment. After exiting the meeting, ministers admitted the discussion had been difficult. “If we were fully in agreement it would
take, what, 5 minutes but it took four hours,” Iraq’s Mr. Abdul-Mehdi told reporters at a press briefing. Nigerian oil minister Diezani
Alison-Madueke told reporters, “A lot of us are feeling the pain right now.”
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