In World Economy News 28/11/2016
OPEC’s struggle to balance oil supply and demand globally is exposing economic fault lines around the world.
The Organization of the Petroleum Exporting Countries heads into a highly anticipated meeting this week facing a difficult dynamic: Cutting oil production could open the door for other producers, including in the U.S., to ramp up their output at the expense of OPEC members. Failing to cut output could keep oil markets oversupplied, potentially knocking prices down and hurting some already troubled OPEC members.
Either outcome is set to shape the path of the global economy and markets that remain deeply sensitive to movements in oil prices.
The oil cartel is negotiating oil-output cuts not only from its 14 member nations but also from a host of producing countries outside the cartel including Russia, Kazakhstan and Brazil. Those countries are unlikely to pitch in this time, in part because of global market conditions OPEC helped usher in—leading to two years of depressed oil prices.
“At the end of the day, everyone is looking after their own interests and no one wants to lose market share,” said Amrita Sen, chief oil analyst at Energy Aspects.
GDP in Russia and Kazakhstan is projected to fall 0.8% in 2016, while Brazil’s will fall 3.3% in 2016 and 3.8% in 2015, according to the International Monetary Fund. Brazilian state oil giant Petrobras is weighed down by around $128 billion in debt and would be financially weakened if it cut back.
Even OPEC’s own members have long resisted an output cut, and their talks could easily break down on Wednesday in Vienna.
In November 2014, OPEC sent prices lower when it decided against cutting production to address oil supplies that were outstripping demand, and instead decided to keep pumping to defend its market share. The main culprit for the oversupply, U.S. shale producers, would eventually buckle as prices fell, OPEC believed, and the market would rebound as American output fell.
Instead, U.S. output proved resilient, OPEC output rose to record levels and prices fell to levels not seen in more than a decade, touching $27 a barrel in January. U.S. oil prices fell $1.90, or 4%, to $46.06 on Friday. While the U.S. oil patch saw a huge wave of job losses and slashed investment over two years, conditions have stabilized in recent months.
Now, OPEC’s hope is that Russia, which produces more crude oil than any other country, can act as a sort of force multiplier for the cartel’s promised cuts. According to people familiar with the matter, OPEC is considering cutting more than 1 million barrels a day and has asked Russia to slash output by 300,000 barrels a day—taking over 1% of global supply off the market.
Russia has signaled its willingness to hold production steady at 11.2 million barrels a day, a post-Soviet high, but President Vladimir Putin has stopped short of endorsing a cut. Energy Minister Alexander Novak says a so-called production freeze amounts to a cut of 200,000 to 300,000 barrels a day because Russia would have pumped even more in 2017.
Though Russia’s production is historically high, the country gets just under half its government revenue from oil and gas and has little room to maneuver. Its oil industry is weighed down by American and European Union sanctions related to the conflict over Ukraine.
“Russia is already facing a significant budget deficit this year and next and we see how active it has been this year in its attempts to reach agreement with OPEC,” said Alexander Kornilov of Russian investment company Aton.
One of Russia’s biggest competitors on the oil market is OPEC kingpin Saudi Arabia, which is in similarly dire economic straits. It posted a record deficit of $89 billion last year and borrowed $10 billion from a group of international banks in April, its first foreign borrowing in more than a decade.
The two countries are already fighting over customers from China to India to Poland, and have little incentive to cede ground, analysts said.
OPEC is looking for 200,000 barrels a day in cuts from producers other than Russia, but there aren’t a lot of candidates. One country often mentioned is Kazakhstan, but it is looking to raise output right now. A consortium of oil companies, including Exxon Mobil Corp and Royal Dutch Shell PLC, has just started up the giant Kashagan oil field there—a $50 billion feat that the international firms are pressing to recoup.
There could always be a surprise. Close OPEC watchers point to 1998, when after months of secret, and often fractious, negotiations, OPEC succeeded in getting Norway, Mexico and others to join a production cut after prices fell to $10 a barrel. In a year the global oil market stabilized and by 2000, oil prices had more than doubled.
Times have changed. Mexican production was mostly state-controlled then but is now open to international companies. Norway’s production was on the upswing in 1998. Now, the Nordic nation is fighting declining production and unlikely to help OPEC, said the country’s oil minister, Tord Lien, in an interview.
Mr. Lien pointed to market forces already at work, with low prices slowly cutting production from high-cost fields and demand driven by cheap gasoline catching up to supply.
“The market will rebalance itself soon,” Mr. Lien said.
Source: Wall Street Journal
