OPEC to keep "no output cut" policy

Oil&Gas Materials 27 August 2015 17:14 (UTC +04:00)
OPEC will remain steadfast in its policy of maintaining high output, despite the renewed slump in oil prices and the potential return of exports from Iran.
OPEC to keep "no output cut" policy

Baku, Azerbaijan, August 27

By Aygun Badalova - Trend:

OPEC will remain steadfast in its policy of maintaining high output, despite the renewed slump in oil prices and the potential return of exports from Iran, Tom Pugh, economist at British economic research and consulting company Capital Economics believes.

"The core Gulf members of the cartel are in a strong enough financial position to weather an extended period of lower oil prices," Pugh said in the report obtained by Trend. "What's more, lower prices now should boost global economic growth and demand as well as curtailing alternative sources of production, not least US shale, which should lead to higher prices in the future."

Pugh noted that as oil prices continue to fall the calls for an emergency OPEC meeting and output target cuts grow stronger.

Last week Iran's Oil Minister, Bijan Zanganeh said that holding an emergency OPEC meeting may be "effective" in stabilizing the oil price.

"Iran endorses an emergency OPEC meeting and would not disagree with it," Zanganeh told reporters in Tehran.

According to some OPEC delegates, a meeting is unlikely unless Saudi Arabia is in favor, Reuters reported. The country is the world's major oil exporter and prefers to keep its market share rather than cut output to support prices.

OPEC has roughly split into two groups, Pugh said in a report.

"The first group wants to maintain the current output target. This group consists mainly of the wealthier Gulf countries, that is, Saudi Arabia, Kuwait, Qatar and the UAE. The second group consists of the poorer members of OPEC who want a cut in production, namely Iran, Iraq, Nigeria, Algeria, Venezuela, Libya, Angola and Ecuador."

"The second group outnumber the first by 2-1 and could call an emergency meeting if they wished. (It only needs a simple majority of the 12 members to call an emergency meeting.) But it is largely seen as pointless without the support of Saudi Arabia, by far the group's largest producer," Pugh said.

In addition, none of the second group are really in a position to cut their own output, according to the economist.

"Indeed, of the eight countries we put in the second group, both Iran and Iraq are recovering from decades of sanctions and have said they actively plan to pump as much oil as possible, regardless of the price. Libyan output remains disrupted by fighting so barely has any output to cut, and the African and South American members are struggling financially so they need to continue pumping at full blast to maximize revenues," he said in a report.

"As a result, when these countries call for a cut in the production target, they are really calling for Saudi Arabia and its allies to reduce output," Pugh said. And he doubts that the first group's countries are altruistic enough "to cut their production purely to benefit the rest of OPEC and non-OPEC producers, especially as the prime beneficiary would be Saudi Arabia's long term rival, Iran."

He also believes that even if an emergency meeting is called, and a production target cut is agreed upon, there is little chance of the group actually sticking to it.

OPEC is already producing about 2 million barrels per day over its quota. Indeed, the quota has historically been largely seen as a floor rather than a ceiling. High OPEC output should therefore help to prevent prices from rebounding sharply even as China fears recede and demand recovers, Pugh said.

Currently, OPEC's quota for oil production is 30 million barrels per day. International Energy Agency's latest data show that OPEC crude production fell in July by 15,000 barrels a day to 31.79 million barrels a day.

Despite the fall, cartel's production held steady near a three-year high, according to the agency.