Few options on oil prices as Opec ministers meet

Opec oil ministers meet in Vienna today amid a slump in oil prices, but they have few policy options available to stem the slide even if they are able to reach an agreement.

Oil prices are at their lowest levels in more than four years, when they were hit by the economic slump that followed the global financial crisis.

The Middle East/Asia benchmark futures, Oman crude for January delivery, fell another US$2 a barrel in the two days before Opec’s meeting, closing down $1.40 yesterday at $76.75.

Oman futures prices have declined by more than 30 per cent since the midsummer peak, in line with other world benchmarks.

In a round of meetings before the official gathering, there has been little sign that Opec ministers are near agreement on a course of action.

Arriving in Vienna yesterday, the ministers had little new to add to their recent comments.

In an interview with the Financial Times,the UAE Minister of Energy, Suhail Al Mazrouei, said: "I don't think we should panic. There is nothing that should cause us to panic. Yes, there is an oversupply but that oversupply is not an Opec problem. But the market will fix it."

In Vienna yesterday, Mr Al Mazrouei further said that expansion of the Ruwais refinery, more than doubling its capacity, will mean that the UAE needs to export less of its crude.

“The oil that is meant for export will be reduced as we ramp up the Ruwais refinery more and more,” he told reporters.

The Saudi Arabian oil minister, Ali Al Naimi, likewise told reporters in Vienna that he expects the market to "stabilise itself".

However, there is a clear dichotomy between those members in a better position to weather a period of relatively low prices – particularly, the Gulf states of Saudi Arabia, the UAE and Qatar, which have budgets based on lower prices and huge fiscal surpluses – and those whose budgets are already severely underwater – most notably, Venezuela, Nigeria and Iran.

Indeed, the failure of the Opec preparatory meetings, which have mostly involved the Iranian oil minister Bijan Zanganeh pushing Gulf members for an agreement to cut Opec export targets, have only served to underline Opec’s lack of options.

In the latest meeting on Tuesday, which included Saudi Arabia – the group's most powerful member – and ministers from the non-Opec members Russia and Mexico (which have long held "observer" status at the group) – Mr Al Naimi, said for the umpteenth time that oil prices would be determined by market forces.

Analysts say that the Emirates and other countries with low budget break-even levels are not likely to alter their policies based on the recent shift in the oil market.

“Don’t forget, we have had a three-year period of exceptionally low volatility in the oil market and it is now returning to something like normal,” said Sebastien Henin, head of asset management at The National Investor, an Abu Dhabi-based asset management firm. “Despite the fall in oil prices, I do not think it is much of a concern for the local economy from a budget break-even point of view – we are still above the break-even point. But for sure it would be less comfortable in terms of running surpluses.”

Meanwhile, the powerful chairman of Rosneft, Russia’s largest oil company, said Russia would not cut production even if oil prices went to $60 a barrel.

For several weeks, analysts have been trying to guess the real Saudi strategy and many have concluded that it is to live with a period of relatively lower oil prices forestall higher-cost production, especially the unconventional (shale and other) production that has been surging in North America.

The economics of US producers is not clear cut, however. As Andrew Liveris, the chief executive of Dow Chemical, pointed out at a petrochemicals gathering in Dubai this week: “Incremental producers in the US are already suffering at $75 oil, but they are not shutting in production because that’s a sunk cost. So you are not going to get a lot of producers stopping just because it’s at $75.”

Saudi oil policy has become much more sophisticated in recent years and is part of a broader strategy to diversify both within their own economy and geographically. With Khalid Al Falih, chief executive of Saudi Aramco, nodding in agreement beside him, Mr Liveris added: “All the oil price talk … look, you have to run a diversified integrated [industrial] strategy because you are never going to be able to predict the price of commodities.”

Even if Opec ministers agreed a cut, there would be a problem of credibility. As oil prices slumped in September, for example, Opec produced at 30.7 million bpd, well above its official target of 30 million bpd.

The most likely scenario would be for Opec to adhere to the status quo – which would mean cutting from actual current levels of over-production – and to let lower oil prices both choke off investment in additional, higher-cost production and help the world economy to recover.

“I don’t think there will be a cut; at best an agreement to adhere to the 30m bpd overall Opec target,” said Robin Mills, the head of consulting at Manaar Energy Consulting in Dubai. “Apart from Saudi and the UAE and perhaps Kuwait, no-one else is really likely to cut and I think current oil prices are not too bad from the Saudi and UAE point of view. They will see what happens up to February, and if the lower prices start having an impact on shale producers.”

As Bank of America Merrill Lynch points out, keeping oil prices at current levels would require that US shale output growth would be 500,000 bpd next year, much less than the 900,000 bpd predicted by the US energy information agency. But $60 per barrel would mean no growth next year.

As Saudi Arabia can add or cut production more quickly than most other producers, a period of lower oil prices gives it more flexibility to maximise revenues. Bank of America concludes: “We see Saudi trying out higher volume and lower prices for a while.”

amcauley@thenational.ae

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