It was a high drama Friday in Vienna. In its official statement, OPEC decided not to directly address the group’s official production quota of 30 M/bpd production. The lack of action contradicted earlier reports out of Vienna that the group had raised quotas. However, OPEC’s can kick on quotas is significant in and of itself.
In short, the can kicking on quotas legalizes over-production versus the quota system. By taking no action, OPEC essentially green-lighted its over-production, saying it would maintain current production levels, which are approximately 1.5mmbpd above the quota.
After much speculation, the production quota was not even mentioned in OPEC’s formal press conference. This will cause some to question the relevance of OPEC going forward. If quotas mean nothing, and OPEC members can’t agree on changing them, then what is the point of the group?
Oil Prices Have Been Volatile All Day As The Story Developed
Oil prices have been volatile all morning. As Oilpro wrote earlier Friday morning, initial reports leaked before the press conference said that OPEC had decided to raise its official quota to 31.5 M/bpd. That sent WTI diving below $40. As of midday trading, the US benchmark was trading at $40.20/bbl.
Read William Edwards’ Analysis Of The Decision Here
Quota Will Be Reconsidered On June 2
OPEC “decided to postpone this decision to the next meeting when the picture will be clearer,” Secretary-General Abdalla al-Badri said. Nigerian Oil Minister Emmanuel Ibe Kachikwu, OPEC’s current president, said that given the present condition of the economy, OPEC would retain production at current levels. “We will hopefully converge between January and June” to reassess the market, he added.
In other words, current production near 31.5 M/bpd is the de facto ceiling for the group. An official quota will be revisited at the group’s next meeting on June 2 in Vienna.
The Market Share Battle Continues
Today’s decision reflects a recognition of OPEC’s existing production levels, and in essence gives its 13 members (Indonesia joined Friday) carte blanche to produce irregardless of a quota. For now, 30 M/bpd is history. Or, “31.5 is the new 30,” and since current actual production doesn’t represent a quota, members are free to produce beyond this. The market share battle continues.
The reference to ~31.5 M/bpd of OPEC’s current production in the press conference is a reflection 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.
Today’s decision also reflects turmoil inside of OPEC. It seems that every OPEC member supports cuts from other members. But no one is willing to curb their own output- they’re hurting too much.
It appears also that our reporting that Saudi’s attitude- towards its rival oil producers would be more antagonistic was a factor in today’s decision. Saudi is ramping up, rather than scaling down, its battle for market share and regional gravitas. Now it doesn’t have a recommended quota to worry about.
Thus, 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.
Some Members Wanted A Cut
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.