Ahead of the announcement of OPEC’s official decision later this morning, several OPEC delegates said the group has decided to raise its 30 M/bpd recommended production ceiling to 31.5 M/bpd. If these delegates are correct, today’s decision reflects a recognition of OPEC’s existing production levels- it has adjusted the recommended ceiling to actual levels of production. Bloomberg is reporting that decision was made partly to include room for Iranian oil, set to be released into the global market early next year after Western sanctions.
Specifically, the new 31.5 M/bpd ceiling is reflective of the reality that OPEC has been producing beyond 30 M/bpd every month this year. In October, the group produced about 31.4 M/bopd, according to its monthly market report. Thus the new ceiling is reasonably close to the group’s most recent estimate of actual output compiled from secondary sources. Notably, Bloomberg notes that the group has previously realigned output targets per secondary source estimates.
Oil prices reacted swiftly to the announcement. Brent dropped 2.1% to $42.93 a barrel, and West Texas Intermediate fell 3.1% to $39.81.
It appears initially that our reporting that Saudi’s attitude- its posture- towards its rival oil producers would be more antagonistic was also a factor in today’s decision. 1) The emergence of Russia as Saudi’s principal market share competitor, 2) the impending return of Iranian oil to the global market next year, and 3) the heightened geopolitical tensions between Saudi and both Russia and Iran over the Syrian and Yemen crises, appears to have formed a large part of Saudi’s “mental furniture” in Vienna.
The Saudi-led group’s decision comes despite the clamors of OPEC’s poorer members for it to curb output. In recent weeks, Venezuela, Iran, and Algeria have been among the countries that have urged OPEC to curtail production.
Prior to the meeting, Saudi Arabian oil minister Ali Naimi said that rising global demand could absorb an anticipated increase in Iranian production next year amid the lifting of Western sanctions.
With regard to demand, China will likely double its strategic crude oil purchases in 2016 to take advantage of collapse in oil prices.
China is forecast to add 70-90 million barrels of oil to storage tanks next year in order to build up its SPR, according to a majority of respondents in a poll of five analysts and data compiled by Reuters analysts.