By Colin Fenton
June 9, 2015
Analysts expected the June 5 OPEC meeting to be a non-event where the group would not change its production strategy. That view proved correct. But that was just one of the many things OPEC did not do last Friday.
For example, despite allotting four hours for oil ministers to discuss the host of risks facing global oil markets, their closed-door session lasted less than 90 minutes. Secretary General Abdalla Salem El-Badri told us afterwards that the decision to leave the production target at 30 million barrels per day (million b/d) was unanimous and there was no debate. This brevity and accord would have been unlikely ten weeks ago when the OPEC basket stood at $50.83 per barrel. It was unthinkable five months ago when prices were at $41.50 per barrel.
Because the ministerial meeting was so short, the briefing for accredited analysts and media took place two hours earlier than scheduled. Startled reporters who had stepped out for a coffee rushed back to the conference room. The day was over by 2:45pm: it was clear that OPEC did not want to do or say anything that could be construed as a change in course.
The briefing with analysts lasted for 45 minutes. After a spokesman read the official communique from the ministers' session, we discussed its contents with OPEC’s Secretariat: the Secretary General, President, and Director of Research.
The communique makes no mention that OPEC's actual oil production is running at least 800,000 b/d above the group's plan. We analysts challenged the Secretariat on this point. President Sada explained that 30 million b/d is an average target level for the year. Seasonal factors swing monthly output around the average. With a bemused smile, Mr. El-Badri admitted that in the absence of individual quotas for countries, it is hard to enforce a specific group level. No one spoke of the mid-year math: For 2015 OPEC production to average 30 million b/d would require about a 1.6 million b/d output cut starting in three weeks.
Such a cut is not going to happen voluntarily. However, due to a wide variety of factors facing oil markets, OPEC oil production in the second half of this year could be substantially higher or lower than it is currently.
Higher OPEC production could come from the easing of sanctions on Iran. Mr. El-Badri expects any restart of Iranian supply will be slow and will not result in significant increases before OPEC's next meeting on December 4. He did not mention the 30 million barrels Iran reportedly has in storage, or comment on the risk of that supply dumping into the market. Higher production could also come from a supply surge in Libya, as happened last September. That surprise delivered 550,000 b/d, an increment larger than the output of Ecuador. A repeat would put OPEC production nearly 1.4 million b/d above its self-described “ceiling”.
Lower OPEC production could result from sectarian violence in Iraq, operational hiccups in Libya, or social unrest in Algeria, Nigeria, or Venezuela. What if so-called Islamic State forces defy expert opinion and take Baghdad or Basra? What if France's concern that Iran will deny sufficient access to inspectors scuttles the Iranian nuclear deal? None of these risks were addressed in our forum, other than in Mr. El-Badri's general reference that there are "rich countries and poor countries" within OPEC and his observation that the presence of a geopolitical conflict within a country does not necessarily mean there is an oil production problem.
The Secretariat did not comment on what OPEC's strategy for market share has meant for the group's spare capacity, which is also all of the world’s spare capacity. Now at 1.7 million b/d—less than 2% of global demand—it's the lowest in three years and one of the lowest in the group's fifty-year history.
Then, there's the non-OPEC producers. We talked about the large capex cuts made both by OPEC and non-OPEC. But our conversation ignored the likelihood of an increase in the North American active rig count within the next three months. No one mused on the working rig statistics that Baker Hughes would publish later that day, and how these factors were being viewed within OPEC.
OPEC has long maintained, accurately, that it does not have the power to set the oil price in a supply constrained world. At this OPEC meeting, the Secretariat declined even to specify any particular price or price range as the fair balance between producers and consumers.
Mr. El-Badri summarized OPEC’s world view and strategy for inaction when he said: "We don't have a price target and we don't endorse a price. We leave it to the market. The key question now is the economy."
Colin Fenton is a non-resident Fellow at the Center. Since 2010, Fenton supervised commodities research at J.P. Morgan Chase & Co., where he was also the firm's chief commodities strategist, until stepping down recently. The views expressed are his own.