The July - August OPEC Bulletin released on Monday, indicates that the oil producer organization OPEC is betting on increasing global demand rather than on production cuts in order to balance the supply and demand ratio which in turn governs prices.
Expressing OPEC’s views on the current low oil prices the bulletin says, “Today’s continuing pressure on prices, brought about by higher crude production” adding “remains a concern for OPEC and its Members - indeed for all stakeholders in the industry.”
Global oil prices are approximately 50% lower than what they were a year ago which is affecting the economies of the producer countries to varying degrees. There was a slight spike in prices on Monday with October crude (CLV5 -3.01%) up nearly 6% to settle at $47.86 per barrel on NYMEX while on the ICE Futures Exchange, Brent crude (LCOV5, -2.86%) was up by 5.7% to trade at $52.90 bbl. Prices however retreated slightly in overnight trade on Monday/Tuesday.
Meanwhile, prices jumped by almost 10% on Thursday last week largely as a result of news that Venezuela, an OPEC member, had requested a special meeting, including non OPEC member Russia, to discuss ways of ending the pressure on the oil price.
The spike on Monday, which built on the increases of the previous week, came on the back of reports from the U.S. Energy Information Administration that oil production in the U.S. for 2015 has been lower than previously estimated.
The OPEC bulletin points out that the continuing lower oil prices mean a reduction in investment saying, “Failure to invest now could mean prices in the coming years spiking to levels inconsistent with what is considered ‘reasonable’ for both consumers and producers.”
The problem facing OPEC members is that most of their economies are one dimensional, relying almost exclusively on oil revenue for their existence. While countries such as Saudi Arabia have large stockpiles of cash and low foreign debt, the majority of members will be unable to sustain low prices for much longer. Nigeria has already cut back as current prices make oil production in that country uneconomical.
The bulletin continues, “There is no quick fix, but there is a willingness to face the oil industry’s challenges together.”
Protecting their market share is the first priority for Saudi Arabia, according to Tariq Zahir, a managing member of Tyche Capital Advisors who said [Saudi Arabia] “would continue producing at record levels, especially with Iranian oil coming online.”
Zahir added that the Saudis have “made it clear they will not cut [output] unless other OPEC members cut” which seems very much to be a case of saying the tail should wag the dog.
The bulletin comment, “But if the wide-ranging projections on oil demand are correct, then it is just a case of riding out the storm and waiting for calmer waters to return” sums up the OPEC attitude going forward. With this in mind, oil prices can be expected to remain at current levels into 2016.
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