OPEC is worried that its plan to drain a global oil glut — and thereby raise crude prices — isn’t working.
A long-planned meeting in St. Petersburg, Russia, today to discuss the oil market with big producers outside the cartel has turned into a critical gathering.
Over the weekend, the Organisation of the Petroleum Exporting Countries said, its ministers have held a series of “intensive consultations” about the challenges for an output-cutting deal the 14-nation cartel struck last year with Russia and other big producers.
The agreement was supposed to take almost 1.8 million barrels of crude oil off the global market and drain an oversupply that has weighed prices down for three years and sent a shock through the economies of oil-producing economies. But prices have remained stubbornly low as the glut persists.
Brent, the international benchmark, fell 2.5 per cent, to $US48.06 on Friday because of doubts about OPEC’s ability to turn around the market.
Saudi Arabian energy minister Khalid al-Falih cut short his vacation to come to St. Petersburg for a committee meeting he sometimes skips because of the gathering’s sudden “strategic importance” and “the high expectations of the times,” said OPEC Secretary General Mohammad Barkindo.
Mr Falih has been calling OPEC oil officials all weekend, said a person close to the minister, describing him as “very nervous.” Mr Falih declined to speak with reporters. A Saudi oil ministry official didn’t respond to a request for comment.
Mr Falih met his Russian counterpart, Alexander Novak, yesterday. Saudi Arabia is the de facto leader of OPEC, while Russia is the world’s top producer and leader of a faction of 10 non-OPEC producers that pledged to cut output.
The two men will preside over a gathering of several OPEC and non-OPEC producers later today designed to shore up support for their efforts to limit global oil output. Among the topics, Mr Novak said, will be production from Libya and Nigeria. The two OPEC members, which were exempted from last year’s deal, have recently raised output.
“I think that as soon as these countries reach a stable production level, they must join other responsible producers and make their contribution to the measures aiming to rebalance the market,” Mr Novak said, according to TASS, the Russian state news agency.
Libyan and Nigerian officials have signalled a willingness to limit their production once it stabilises, but the details are being negotiated.
An OPEC official said Iraqi production would also be discussed, as the cartel member’s output has remained much higher than its agreed upon levels.
OPEC officials and analysts cautioned against expecting the cartel and its allies to take major action today. It is a routine committee meeting with only handful of the 24 countries involved.
Another reason to expect little action: OPEC is still weighing how to deal with US producers, which remain largely outside of the cartel’s control.
Shale drillers — who work on shorter-term projects than traditional oil producers — took advantage quickly when oil prices briefly rose last year after the OPEC deal, sending more crude into global supply. They have also learned to drill at lower prices, and US production has maintained its upward swing even as prices have remained depressed this year.
OPEC members have repeatedly ruled out making deeper production cuts. While that action would likely raise prices, it would probably also allow shale drillers to ramp up output even more, reducing OPEC market share and eventually killing any rally.
“Market dynamics have been challenging,” Mr Barkindo said. “They have been almost challenging established economic theory.”
Saudi Arabia’s goal this week is to “convince the other members that by sticking to the deal all OPEC producers will benefit from higher revenues,” said Giovanni Staunovo, commodity analyst at the Swiss bank UBS.
Iraq and the United Arab Emirates, two of OPEC’s largest producers, haven’t been meeting their output cut-pledges, JP Morgan Chase & Co. said in a report last week, making them “material drags on overall compliance.” Saudi Arabia has picked up the slack, cutting more than pledged, but the kingdom in recent months has been pumping more to meet higher summer demand.
Ecuador’s oil minister recently said his country had no plans to stick to its output-cut pledge because the country needed the revenue. Ecuador is a small producer, but its oil minister’s unusual public stance drew a phone call from Mr Falih, who got the country to issue a statement reiterating its support for the output deal.
Mr. Barkindo said today’s meeting could result in recommendations for OPEC and its allies to consider in the future. He said overall compliance with the deal since January had been “excellent.”
“The rebalancing process may be going at a slower pace than we earlier projected but it’s on course. It’s bound to accelerate in the second half,” he said.