OPEC’s meeting over the weekend, which held off from making further cuts despite oil prices hovering in the low $50s per barrel, a level that is causing distress among the cartels’ members.
What was eyecatching, however, was not the failure to act per se but the byplay. As we noted earlier, OPEC members tend to cheat even in good times and pump in excess of quotas. The incentive to exceed limits is even greater when national budgets are strained by a plunge in oil revenues, the mainstay of these economies. We had posted on the fact that Nigeria, which had conformed to the latest production cut, would not implement an additional reduction until other OPEC members lived up to their recent commitment.
OPEC members said they would like to reduce production a further million to million and a half barrels in December, but the Saudis, backing Nigeria’s position, are apparently asking for proof that other members are indeed living up to quotas.
This could get interesting.
Note some further novel moves, again signs of strain:
1. OPEC has set a target price of $75 a barrel (note they had abandoned targets four years ago). A lot of oil stock analysts have their targets at $90.2. OPEC is now calling for non cartel-members to help. This is further evidence of the producer group’s diminished power. Consider this bit from Bloomberg:
[OPEC Secretary General] El-Badri called for outside help to halt the plunge in prices. “All non-OPEC should come and help, it is a big burden for OPEC,” he told reporters. As well as Russia, “the ones we know that have the capability to cut are Norway and Mexico.”Russia’s energy minister is expected to attend the Algeria meeting, El-Badri said. His plea for help elsewhere may fall on deaf ears after Norway, the world’s fifth-biggest oil exporter, ruled out production cuts earlier this month. “I don’t see any scenarios with regards to that,” Norwegian Oil Minister Terje Riis-Johansen said in a Nov. 18 interview.
Russia also seems unlikely to cooperate, given its dependence on oil revenues and the fact that it has already spent a fifth of its FX reserves defending its currency.
Some analysts also seem newly-skeptical of the likelihood of oil reaching higher levels any time soon. From Reuters:
$75 a barrel doesn’t look doable in the short term,” said Raja Kiwan of consultancy PFC Energy. “Given the fractious nature of OPEC on quota compliance, they may have some problems.”
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Notice re Russia that production has been falling since the first of 2008, even with higher prices. The Russian practice of taxing away virtually all profit has left their oil production infrastructure in sad space.
Combine this with the country’s complete inability to get external financing for its business operations, and you have a passive actor pumping as much as deteriorating internal conditions allow.
Re OPEC not moving on its production targets. Has anybody noticed that OPEC long ago lost control of the price of oil? The bubble up to $147 and down to $50 reflected very supply and demand, despite the near universal protestations to the contrary.