Benchmark Brent crude plunged to a four-year low, below US$73 a barrel, yesterday (27 November) after oil cartel OPEC chose to leave its 30MMbbl/d output target unchanged at its latest meeting in Vienna.
The move, led by Saudi Arabia, went against some OPEC member’s calls for production cuts to arrest a slide in global oil prices, seen since June this year, driven by lower Chinese and European demand for oil and surging suppliers from US shale oil producers.
OPEC members Venezuela and Iran will likely be the worst hit, while Arabian Gulf members will be better placed to ride the weak prices. But, Venezuela’s Foreign Minister Rafael Ramirez said he accepted the decision and that he hoped it would drive out some of the higher-cost US shale oil production from the market, reported Reuters.
Norwegian analysts Rystad said that a voluntary cut in supply would have supported oil prices and likely improved OPEC member countries’ revenue. However, it would have also ensured strong growth from US shale drillers and other competing producers, reducing OPEC’s market share in the medium term.
"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.
Rosneft’s CEO Igor Sechin was reported as saying that oil prices could fall below $60 by mid-way through next year. Sechin also said US oil production would fall after 2025 and that an oil market council should be created to monitor prices.
Rystad yesterday said: “Surging US shale oil supply and weak global demand prospects will cause an increasingly severe over-supply situation ahead. The supply-demand imbalance is structural and could persist. Without any adjustments to supply, oil inventories would implicitly build by an average 1.8MMbbl/d until 2020, which in reality is impossible. Markets must adjust. US shale oil production will grow by 1.1MMbbl/d next year, even at current oil prices and no assumed growth in horizontal rig count. Additions from the US outpace global demand in the next two years and other non-OPEC projects under development will add to the supply over-hang.”
But, Westhouse Securities much of the commentary around OPEC’s decision has focused on “the importance of avoiding panic, and the longer term powers of supply-demand equilibrium with stress on more positive demand outlook at lower oil price and high marginal costs for some of oil producers, especially US.”
A statement from OPEC noted: “Although world oil demand is forecast to increase during the year 2015, this will, yet again, be offset by the projected increase of 1.36MM/d in non-OPEC supply. The increase in oil and product stock levels in OECD (Organization for Economic Co-operation and Development) countries, where days of forward cover are comfortably above the five-year average, coupled with the on-going rise in non-OECD inventories, are indications of an extremely well-supplied market.”
It continued that the OPEC meeting noted concern over the “rapid decline in oil prices in recent months,” and “concurred that stable oil prices – at a level which did not affect global economic growth but which, at the same time, allowed producers to receive a decent income and to invest to meet future demand – were vital for world economic wellbeing. Accordingly, in the interest of restoring market equilibrium, the Conference decided to maintain the production level of 30MMbbl/d, as was agreed in December 2011.”
OPEC’s next scheduled meeting is June 2015.