The OPEC Summit— what’s in the barrel?

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Oil prices have slipped to a six-year low ahead of the Organisation of Petrol Exporting Countries (OPEC) summit to be held in later today. That is hardly surprising. The low oil prices are a consequence of design by OPEC to maximise production to smother competition from avenues such as shale oil, which is more expensive.

OPEC, notably Saudi Arabia, opted a year ago to maintain output and market share, at the cost of shrinking prices, in the face of the competition. Consequently, oil prices have fallen by about 40 percent over the past year.

There seems to be a deep rift within OPEC about maintaining production levels. Many member countries are not in favour of maintaining or raising production and Saudi Arabia is expected to consider the various factors involved at the meeting. Venezuela and Nigeria, for instance, could do with oil production cuts.

However, Saudi Arabia has apparently cut prices on all grades of oil sold to the US. Iran plans to increase output by 500,000 barrels a day within a week of Western sanctions being withdrawn and by a million barrels within six months. Over the past 18 months, OPEC members have pumped more than the targeted 30 million barrels a day, according to data from Bloomberg. The target may be raised slightly to accommodate the return of Indonesia, which produces 900,000 barrels a day.

Although industry experts do not expect a substantial change in the status quo, what remains to be seen is how long OPEC will hold together with its current policy. The problem for OPEC is that prices have been on the decline for longer than expected. Only recently has US shale oil production eased up, which is why many expect OPEC to continue with its policy. According to the US-based Energy Information Agency, US oil producers wrote down about $38 billion in assets in the third quarter of 2015 and news reports cite about 250,000 layoffs globally.

Meanwhile, the global glut is likely to continue in 2016 and US shale oil producers are likely to find it difficult to restart output due to funding problems. Consumers though are not complaining—they have probably never had it so good in a long time.

 

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