Oil price erosion forms cracks between Opec members

23 October 2014

Prospect of lower prices ahead triggers call for action from group’s fragile economies

The current climate of falling oil prices will prove a testing time for Opec as clear divisions emerge between members of the oil producers’ group on what action to take to prop up the market.

While Saudi Arabia and the smaller Gulf exporters appear to be digging in their heels to maintain production – which has risen above Opec quota levels this year – other governments in the 12-member group are not as comfortable with prices below $90 a barrel.

Venezuela, where oil accounts for 95 per cent of export revenues, was the first member to call for action to prevent price erosion. It has accused other Opec members and the US of oversupplying the market in order to increase pressure on it to meet its debt obligations.

Libya’s Opec governor has reportedly called for the group to reduce output by at least 500,000 barrels a day (b/d), saying the market is oversupplied by twice this amount.

Riyadh has rebuffed calls for an emergency Opec meeting and has given no indication that it is willing to consider production cuts when the group meets in Vienna on 27 November.

The divisions within Opec throw into question the ability of the group to assert its authority on the market amid rocketing supply from the US – the world’s biggest crude consumer – and slower-than-expected demand growth in key importing economies.

While Saudi Arabia, the UAE, Kuwait and Qatar all have significant cash reserves to fall back on during a period of lower oil revenues, the impact will be felt much harder in other Opec member countries such as Iran, Libya and Venezuela.

Sanctions-burdened Tehran will struggle to balance its budget at current price levels, but the Islamic republic has lost much of its influence in Opec as production and exports floundered over the past two years.

There has been much speculation about the geopolitical motives of Saudi Arabia’s lack of action, but Riyadh’s reasoning could merely be that a period of lower prices is needed to stimulate global growth and, with it, oil demand.

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