OPEC's decision to maintain production levels will have an ongoing impact on the vulnerable oil market. The question remains as to what degree, as actors within the industry attempt to introduce some stability into uncertain current conditions.
“So we’re going to keep going? All in favour of wiping out our competitors and ensuring our continued iron clad grasp on the future of the world’s oil market?”
Well, what do you think OPEC decided? Yes, it’s going ahead with its current 30m BPD output. Following the announcement the general secretary Abdullah al-Badri said the decision was “unanimous” and the Venezuelan Oil Minister Asdrubal Chavez said “It’s been a very successful meeting.”
The market reacted with.. well, a complete lack of surprise. The price of Brent changed not a jot on Friday after the meeting. It was the only viable course of action the group could take after committing to it back in November last year. There had been some disquiet among the members at the beginning of this process but now all appear to have swung behind the Saudis.
Reuters picks up on the group’s origins for an explanation of the current situation. “According to its founding statute, the Organization of the Petroleum Exporting Countries, was established in 1960 to coordinate and unify the petroleum policies of its members. The organisation also seeks “ways and means of ensuring the stabilization of prices … with a view to eliminating harmful and unnecessary fluctuations” as well as a “steady income” for producing countries and a “fair return” on capital for investors in the oil industry.”
The shale revolution dramatically sunk oil prices and so OPEC reacted in the only way it could: by doing whatever is deemed necessary to remove the cause of the fluctuation.
And it appears that was a deceptively simple course of action. Do nothing and the market will correct itself. Do nothing and the glut of oil will mean much less return for production costs. Do nothing and the more expensive US shale producers will shut up shop. Do nothing and watch as projects around the word get scaled back or put on hold. Do nothing and watch as the oil price creeps back up.
There is just one bug in the mix. Iranian oil is poised to once again enter the export market as Western sanctions ease.
It has been described as a sleeping oil giant and analysts forecast that if foreign investment is allowed into the fields across the country, it could be a game changer for the industry. In March The Telegraph warned that agreement in Lausanne to restore Iran back into the international community could “easily trigger a further sell down towards levels around $20 per barrel.”
The deal is due to be finalised very soon on the country’s nuclear oil program. Iranian Oil Minister Bijan Zanganeh has assured other oil group members that they will have the opportunity to add as much as 1 million BPD of supply once that happens. But that may be a conservative estimate – according to BP in 2011 the country was capable of producing more than 4m bpd. Analysts also suggest there is between 7 and 35m barrels of crude in storage that could immediately be placed on sale.
Will OPEC permit this increase in export? One Saudi official told the Financial Times at the meeting last week that “How much they are able to produce and how soon and whether they can produce 1m BPD is questionable.” But Zanganeh had one message to deliver: “We don’t need any decision from OPEC.. it is our right and we have been limited by sanctions. We will return to market.”
If the number of Western executives on planes from Dubai to Tehran is any indication of their intent to accept foreign investment in the country’s oil fields the moment restrictions are lifted, then it is well poised to hit the ground drilling.
Iran has already told OPEC it must reverse the increases other countries made to fill the gap it left when the sanctions were introduced. Zanganeh said, “I asked them to ready. I’m sure that they will.. they are our friends.”