A Tesla Model S passes in front of OPEC headquarters in Vienna, minutes before the group’s bi-annual ministerial began. At both the two-day OPEC International Seminar that has preceded today’s meeting, and today, there has been no discussion of concerns about the potential for long-term decreases in global oil demand.
Today, in the Vienna headquarters of the Organization of the Petroleum Exporting Countries (OPEC), oil ministers from member countries and media from around the globe have gathered in an effort to glean a sense of what’s to come for the global oil market over the next six months.
By now, it’s well documented that Saudi Arabia, the group’s de-facto leader and the only effective swing producer from the past decade, is not interested in ceding market share—not only to U.S. shale oil companies, but also to other OPEC member states. Before the last meeting in November, an official cut in OPEC production was expected by many, and the Oil Kingdom’s decision to refrain from trimming output rocked markets and sent oil prices into a downward spiral.
A lot can change in six months. In fact, earlier this week, rumors were circulating that OPEC would in fact increase its official quota. The reasons for such a move were not clear, except perhaps to re-emphasize the market signal that the cartel’s new motto can be summarized as, “Drill, Baby, Drill.”
Of course, as was best emphasized by ConocoPhillips CEO Ryan Lance yesterday during the second day of the 6th OPEC International Summit, shale oil is “here to stay.” In his view, companies have grown leaner, more efficient, and reduced costs by as much as 30 percent.
Nevertheless, the rumors of a quota increase have proven false. Even as the cartel’s collective crude oil production levels have risen to 30.81 million barrels per day based on last month’s Short Term Energy Outlook, OPEC is keeping the official quota unchanged. Why not adjust the official quota to reflect the current reality? According to Bob McNally, Founder and President of Rapidan Group, OPEC requires a universal consensus to make any official decision. Without universal agreement, no decision is made.
Members express their intention to increase output
Before the official OPEC meeting, press and analysts are allowed inside the meeting room for direct interaction with ministers of member states. Some ministers are more forthcoming than others—states like Nigeria and Venezuela, who are coincidentally some of the worst-hit by the current price environment—are notably taciturn. Oil ministers of Kuwait, Angola, and the United Arab Emirates expressed satisfaction with the current output quota.
Iraq’s oil minister Adil Abd al-Mahdi doubled down on bullishness about the country’s output capacity, saying their production will climb to 6 mbd by 2020. Yesterday, he downplayed the country’s disruption risk in spite of the ongoing conflict with Islamic State, telling the audience that Iraq is, in fact, a safe country and a good place to invest.
Iran’s oil minister Bijan Namdar Zangeneh reiterated the nation’s intentions to return to pre-sanctions production levels within six months after sanctions are lifted.
Theoretically, if the ambitions of Iran and Iraq come to fruition, we could be looking at an OPEC production approaching 35 million barrels per day within the next 2-3 years. Even without continued increases in non-OPEC oil supply, this would far exceed anticipated increases in global oil demand over the next few years, with untold consequences for prices. Will OPEC take steps to mitigate this increase? Not according to Saudi Oil Minister Ali al-Naimi, who stated during the press conference, “Oil production policy is a sovereign right,” and “everyone is entitled to produce what they want.”
However, there are underreported risks associated with unconstrained growth in oil output from both OPEC and non-OPEC producers. Specifically, if production continues to outstrip demand and prices plunge, investment in future oil projects will drop-off. In the medium-term, if ecnomic growth is healthy and global oil demand continues to increase, the oil market could quickly find itself in the opposite situation, in which demand greatly outstrips supply. In the words of Cornelia Meyer, an independent oil analyst, this could “send prices skyrocketing.”
The likelihood of this scenario is unknown. It’s one of many unanswered questions from this meeting. Among them:
- What, if anything, has emerged from the side conversations between Saudi Arabia and Russia?
- What is OPEC’s purpose if each individual member state continues to increase production without restraint in the near term—will the group continue to maintaining an official production quota?
- Will OPEC allow oil importer Indonesia to rejoin its ranks as a full member?
- If U.S. shale producers continue to show resilience in the face of low oil prices, will we see production drop off from higher cost resources, such as ultra-deepwater projects and Canadian oil sands?
- If the global supply glut grows in the next six months and prices fall, what will it mean for unstable oil producing countries who depend on oil revenues to sustain their national budgets and economies—can we expect more geopolitical turmoil as a result?
Bonus Video: To hear some comments directly from the oil ministers of Iraq and Iran, watch our footage from the frantic press scramble for comments from OPEC representatives immediately before the ministerial.