By Alex Lawler, David Sheppard and Rania El Gamal
VIENNA
(Reuters) - Saudi Arabia blocked calls on Thursday from poorer members
of the OPEC oil exporter group for production cuts to arrest a slide in
global prices, sending benchmark crude plunging to a fresh four-year
low.
Brent oil fell more than
$6 to $71.25 a barrel after OPEC ministers meeting in Vienna left the
group's output ceiling unchanged despite huge global oversupply, marking
a major shift away from its long-standing policy of defending prices.
This
outcome set the stage for a battle for market share between OPEC and
non-OPEC countries, as a boom in U.S. shale oil production and weaker
economic growth in China and Europe have already sent crude prices down
by about a third since June.
"It was a great decision," Saudi Oil Minister Ali al-Naimi said as he emerged smiling after around five hours of talks.
OPEC
said in a statement that members had agreed to roll over the ceiling of
30 million barrels per day, at least 1 million above OPEC's own
estimates of demand for its oil next year.
"It
is a new world for OPEC because they simply cannot manage the market
anymore. It is now the market’s turn to dictate prices and they will
certainly go lower," said Dr. Gary Ross, chief executive of PIRA Energy
Group.
The wealthy Gulf
states have made clear they are ready to ride out the weak prices that
have hurt the likes of Venezuela and Iran - OPEC members which face big
budget pressures, but cannot afford to make cuts themselves. Venezuela
and Algeria had calling for output cuts of as much as 2 million bpd.
Venezuelan
Foreign Minister Rafael Ramirez said he accepted the decision as a
collective one and hoped that lower prices would help drive some of the
higher-cost U.S. shale oil production out of the market.
"In the market, some producers are too expensive," he said.
The
OPEC statement made no mention of any need for members to stop
overproducing, nor of any extraordinary meeting to reconsider the
ceiling before a regular session next June.
BATTLE OVER MARKET SHARE
The Organization of the Petroleum Exporting Countries accounts for a third of global oil output.
Gulf
producers could withstand for some time a battle over market share that
would drive down prices further, thanks to their large foreign-currency
reserves.
Members without
such a cushion would find it much more difficult, as would a number of
producers outside the group. Russia's rouble, which has been sliding for
much of this year, extended losses on Thursday to trade more than 2
percent lower than the previous close against the U.S. dollar.
Russia
is already suffering from Western sanctions over its actions in Ukraine
and needs oil prices of $100 per barrel to balance its budget.
A
price war might make some future U.S. shale oil projects uncompetitive
due to high production costs, easing competitive pressures on OPEC in
the longer term.
"Why would
Saudi cut production in the current environment? Why would they want to
support Iran, Russia or U.S. shale producers? So they must have decided:
let the market establish the price. Once the market goes to a new
equilibrium, prices will go higher," PIRA Energy's Ross said.
Kuwaiti
Oil Minister Ali Saleh al-Omair said OPEC would have to accept any
market price of oil, whether it were $60, $80 or $100 a barrel. Iraq's
oil minister, Adel Abdel Mehdi, said he saw a floor at $65-70 per
barrel.
"We interpret this as
Saudi Arabia selling the idea that oil prices in the short term need to
go lower, with a floor set at $60 per barrel, in order to have more
stability in years ahead at $80 plus," said Olivier Jakob from
Petromatrix consultancy.
"In
other words, it should be in the interest of OPEC to live with lower
prices for a little while in order to slow down development projects in
the United States."
VIENNA (AP) -- Reflecting its lessening oil clout, OPEC decided
Thursday to keep its output target on hold and sit out falling crude
prices that will likely spiral even lower as a result.
Oil prices fell sharply on the news. Even though the decision was largely expected, it showed the once-powerful cartel is losing the power to push up markets to its own advantage.
OPEC has traditionally relied on output cuts to regulate supply and prices. But it appeared to realize Thursday that with cheap crude in oversupply, a reduction would only cut into OPEC's share of the market without a lasting boost in prices and with others outside the cartel making up the difference.
Instead, the move to maintain a production target of 30 million barrels a day appeared to reflect acceptance of the Saudi view within OPEC that short-term pain had to be accepted for later gain.
The Saudis and their Gulf allies hope to put economic pressure on rival producers in the U.S., which need higher prices to break even. In the long term, that could help reaffirm OPEC's dominance of the oil market.
It would also be good news for consumers and oil-importing nations.
The global price plunged $5 to a four-year low of $72.76 a barrel. As recently as June it was around $115.
Oil ministers had come to Thursday's meeting facing two unpalatable choices: Cut their production from 30 million barrels a day in an effort to boost prices and see OPEC's market share fall, or do nothing in hopes of riding out the crisis.
Paring output may not have been very effective because supply from non-OPEC countries, like the U.S., remains high. Also, discipline within the 12-member organization is lax and overproduction by some members would have cut into the effectiveness of any production cut.
In any case, OPEC could have not afforded to scale back production by more than 1 million barrels a day — too little to make a sizable dent in supply.
OPEC Secretary General Abdullah Al-Badry suggested all members were on board with the decision to stick to the present output level, telling reporters "the ministers are happy."
"I see no nagging from consumers, no nagging from producers," he told reporters.
In fact, the decision once again appeared to reflect Saudi Arabia's clout over less powerful OPEC rivals.
By opposing an output cut, Saudi Arabia appears to be hoping to drive prices below the level at which shale oil production is economical. Experts say shale oil production turns too costly at the $60 a barrel level.
"When it comes to the raw decision-making, that is left to the unofficial leader, Saudi Arabia," said Alfa Energy chairman John Hall.
Accounting for about a third of OPEC output, the Saudis can weather lower prices because their coffers are well-padded and its production costs are relatively low.
But poorer OPEC members like Venezuela and Nigeria need levels close to $100 or above to fund national budgets. Saudi rival Iran is suffering, too, with the price drop adding to huge revenue losses due to sanctions on its crude sales imposed over its nuclear program.
If sanctions were to be lifted as part of a nuclear agreement next year, Iran still would need prices close to $140 a barrel to finance the government budget. Crude export revenues finance more than 50 percent of the government's outlays.
In the case of Venezuela, the International Monetary Fund says it needs to sell oil at around $120 a barrel to avoid the threat of national bankruptcy. Bank of America estimates that for every dollar that oil prices drop, the state loses $770 million in net revenue over a year. That puts revenue $12 billion a year below peak levels even if current prices don't fall further.
Angola, Ecuador and other OPEC members with
limited production may also suffer — but not so Saudi Arabia's wealthy
allies Qatar, the United Arab Emirates and Kuwait.
Iranian oil minister Bijan Namdar Zangeneh said the "OPEC decision was not entirely what we wanted," and analysts suggested that others share that view.
"I think you're going to see additional tension between the OPEC ranks," said Jamie Webster, senior director of crude oil markets at IHS consultants.
Oil prices fell sharply on the news. Even though the decision was largely expected, it showed the once-powerful cartel is losing the power to push up markets to its own advantage.
OPEC has traditionally relied on output cuts to regulate supply and prices. But it appeared to realize Thursday that with cheap crude in oversupply, a reduction would only cut into OPEC's share of the market without a lasting boost in prices and with others outside the cartel making up the difference.
Instead, the move to maintain a production target of 30 million barrels a day appeared to reflect acceptance of the Saudi view within OPEC that short-term pain had to be accepted for later gain.
The Saudis and their Gulf allies hope to put economic pressure on rival producers in the U.S., which need higher prices to break even. In the long term, that could help reaffirm OPEC's dominance of the oil market.
It would also be good news for consumers and oil-importing nations.
The global price plunged $5 to a four-year low of $72.76 a barrel. As recently as June it was around $115.
Oil ministers had come to Thursday's meeting facing two unpalatable choices: Cut their production from 30 million barrels a day in an effort to boost prices and see OPEC's market share fall, or do nothing in hopes of riding out the crisis.
Paring output may not have been very effective because supply from non-OPEC countries, like the U.S., remains high. Also, discipline within the 12-member organization is lax and overproduction by some members would have cut into the effectiveness of any production cut.
In any case, OPEC could have not afforded to scale back production by more than 1 million barrels a day — too little to make a sizable dent in supply.
OPEC Secretary General Abdullah Al-Badry suggested all members were on board with the decision to stick to the present output level, telling reporters "the ministers are happy."
"I see no nagging from consumers, no nagging from producers," he told reporters.
In fact, the decision once again appeared to reflect Saudi Arabia's clout over less powerful OPEC rivals.
By opposing an output cut, Saudi Arabia appears to be hoping to drive prices below the level at which shale oil production is economical. Experts say shale oil production turns too costly at the $60 a barrel level.
"When it comes to the raw decision-making, that is left to the unofficial leader, Saudi Arabia," said Alfa Energy chairman John Hall.
Accounting for about a third of OPEC output, the Saudis can weather lower prices because their coffers are well-padded and its production costs are relatively low.
But poorer OPEC members like Venezuela and Nigeria need levels close to $100 or above to fund national budgets. Saudi rival Iran is suffering, too, with the price drop adding to huge revenue losses due to sanctions on its crude sales imposed over its nuclear program.
If sanctions were to be lifted as part of a nuclear agreement next year, Iran still would need prices close to $140 a barrel to finance the government budget. Crude export revenues finance more than 50 percent of the government's outlays.
In the case of Venezuela, the International Monetary Fund says it needs to sell oil at around $120 a barrel to avoid the threat of national bankruptcy. Bank of America estimates that for every dollar that oil prices drop, the state loses $770 million in net revenue over a year. That puts revenue $12 billion a year below peak levels even if current prices don't fall further.
Nigeria also
needs a stronger market to flourish. Analysts say the government has
organized its 2015 budget around an oil price of $78 a barrel based on
production of 2.4 million barrels a day — but the country is pumping
only about 2 million barrels a day.
Iranian oil minister Bijan Namdar Zangeneh said the "OPEC decision was not entirely what we wanted," and analysts suggested that others share that view.
"I think you're going to see additional tension between the OPEC ranks," said Jamie Webster, senior director of crude oil markets at IHS consultants.
CW8888: New normal. Life goes on.
ReplyDeleteOPEC's decision Thursday not to cut oil output to support prices was prompted by fear of losing market share to competitors, Kuwait's oil minister said.
"Today, there are many competitors, and OPEC pumps just 30 percent of global output," Ali Omair told local Al-Watan satellite channel from Vienna, where he attended the OPEC meeting.
"It was inevitable to take the right decision not to cut production because it can be compensated by others present in the market, who have the ability to do so."
"Accordingly, we decided that price will adjust itself based on supply and demand and that OPEC is supposed to safeguard its market share in order not to lose its clients," the Kuwaiti minister said.
"OPEC will no longer accept to bear the additional burden of cutting production while others rush to raise their output," he said.