Crude Economics
Will OPEC Freeze Output Next Month?

Our office Magic 8-Ball says: don’t count on it. (And never forget about Betteridge’s Law.) But you don’t have to take a novelty toy’s word for it, just listen to Russia’s energy minister Alexander Novak. Reuters reports:

Russian Energy Minister Alexander Novak said on Friday that OPEC was unlikely take any decisions on coordinated action regarding the oil market at its meeting early next month…Novak told reporters in Russian Black Sea resort of Sochi on Friday that currently, he saw global supply exceeding demand by some 1.5 million barrels of oil per day (bpd), with a forecast of an average oil price in 2016 at $40-50 per barrel.

“In my opinion, any decisions on coordination which would require an obligatory fulfilment, are unlikely to be taken,” Novak told Russian state TV in an interview. “Because we see quite big disagreements inside OPEC on the further development of the situation and on what should, or opposite, should not be done for the market to reach a balance.”

OPEC members are set to meet again early next month for their semi-annual summit, but after April’s special meeting in Doha failed to produce an agreement to freeze production at current levels, there seems to be precious little momentum to produce a similar sort of production coordination deal in two weeks’ time. In fact, in the wake of that failed freeze meeting, the cartel upped its collective output to an eight year high.

The Kuwaiti deputy foreign minister Khaled Jarallah was quoted recently insisting that “[t]here is no choice but to freeze production,” adding that “Iran should learn from the market…the market does not give an opportunity to increase production.” But those comments sound more like wishful thinking than anything else, especially considering that just days before the foreign minister went public in support of a freeze, the Kuwaiti oil minister admitted that he didn’t expect the upcoming OPEC meeting to lead to any market action.

When we’re talking about what OPEC decision-making, what we’re really talking about is what Saudi Arabia is willing to do. Thus far, the Saudis have been content riding out low prices, choosing to compete for market share over reducing their own output to induce a rebound. The ousting of the long-serving oil minister Ali al-Naimi earlier this month helped consolidate power in the hands of the 31 year old deputy crown prince Mohammed bin Salman—a man that has been outspoken about only cutting production if Iran followed suit.

So it seems that so long as Tehran continues to boost its own production in its drive to reach pre-sanctions levels, Riyadh is going to sit on its hands. OPEC is hamstrung without Saudi cooperation, so when you see headlines in the coming weeks about this latest meeting between the cartel’s petrostates, keep in mind that it may be the most pointless summit the group has yet convened.

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