The Organization of Petroleum Exporting Countries (Opec) is meeting on Friday even as crude prices have hit a near 7-year low, falling around 50 percent from the same point last year.
Opec has long lost its teeth as an effective cartel but markets are keenly watching the meeting of a bloc that's contributing 30 million barrels per day of crude out of more than 95 million bpd the world needs.
Oil rose 3 percent on Thursday as Energy Intelligence reported that Saudi Arabia was prepared to moot a production cut at the meeting. However, Reuters later reported such a move was not on the cards quoting a Saudi official who said the output cut talks were baseless.
The 12-member bloc was pumping 31.7.5 million barrels per day as of October, more than a million and a half above its quota of 30 million bpd. The speculation was that Saudi Arabia was thinking of cutting output by one million bpd if, of course, other members agreed to join hands.
However, major members like Iraq and Iran are not prepared for any cut and Tehran has categorically said it's looking at ramping up production as western sanctions ease. It contends that sanctions had given undue advantage to fellow producers over a period of time.
Saudi Arabia also expects major non-Opec producers -- read Russia -- to coordinate with the cartel in cutting output. But Russia also has said no output cut is on the cards. Russia last worked together with Opec in the aftermath of the great decline in price in 1998 when the cartel cut output by as much as 3 million barrels per day. But since then Russia has only looked at boosting output and increasing market share.
With Indonesia, which pumped more than 900,000 bpd on average in August, set to join the cartel, its total output ceiling will only technically go up. That means the official quote could only go up by at least a million bpd. And it's well known that quotas are seldom followed strictly and Opec members try to overcome low prices by excess output. All this is going to worsen the glut.
Even as demand projections indicate that a long-term low price regime is setting in, Opec looks like its hands are exhausted. The once powerful cartel, which could unleash the oil shocks of the 70s, is sitting on the sidelines watching crude oil flowing under its bridge for cheap.
The cartel was founded in 1960 and expanded to its current strength by the beginning of the 70s. It had its time under the sun throughout that decade and a significant part of the next one.
Then the decline set in. For some years, whenever crude prices tumbled and Opec oil ministers assembled in Vienna, the question if Saudi Arabia would use its swing capacity to effect an output cut stayed relevant.
The writing on the wall is clear -- Opec can't influence crude prices anymore and it's fast losing the relevance as a cartel. Secondly, crude prices have entered a phase of long-term decline.
So there are some relevant questions. Why is crude falling? How far down technically is a price bottom? How will Opec producers cope with low prices after having set their budgets on the premise of oil prices ranging from $70 a barrel to $100?
It's not as if demand is not rising. But supply far outstrips demand while a strong US dollar hurts oil prices. With oil markets factoring in $50 oil, demand growth actually hit a five-year high this year, driven especially by robust growth in India. But here's how markets got flooded an Opec swamped.
- According to IEA, in 2014, production from OECD countries itself rose 6.7 percent over the previous year, driven by the output rise in North America.
- The United States overtook Saudi Arabia and Russia as the world's leading liquids producer
- Global stock pile stayed above the historical average this year. For example, OECD commercial inventories stood at a record near 3 billion barrels by end-September.
- On the other hand, global refinery runs dropped by 1.2 mbd in October to 78.2 mbd.
The fall in demand
- According to IEA data, global oil demand in the fourth quarter of 2015 was 95.52 million barrels a day. Its projections show that the next two quarters will see a fall in demand.
- According to the US Energy Information Administration, global crude supply in the fourth quarter of 2016 will be 96.39 million bpd while consumption will be 95.92 million bpd.
However, it's clear that a long-term price decline will eventually lead to bounce back as investment in exploration dry up during a lean period, resulting in a supply fall. But beyond that, will 'cheap' oil cause a bump up in consumption? Hardly so. The energy efficiencies built up over decades of 'high' oil prices, the robust shale gas scene in North America and the developments in alternative energy sources suggest the oil apocalypse predicted by the likes of Stephen Leeb (Coming Economic Collapse, Oil at $200) is a far cry.