Where next for Opec?

09 June 2015

A new era of diversity in supply is sending shockwaves through the organisation

The decision by Opec to maintain current production levels surprised no one and further highlighted the dominant position held by Saudi Arabia within the oil producers’ group.

There has been no indication in the first six months of 2015 that Riyadh had any intention of changing its strategy and kowtowing to its fellow member states by agreeing to initiate quotas on its output. Saudi Aramco is pumping over 10 million barrels of oil a day and that is how it is going to stay.

It is clear that Opec’s dominance is not what it was and judging from the lack of success of its members to convince Saudi Arabia to reel production in, it is questionable how it can recover.

What is so disturbing about the current malaise is how it now seems incapable to deal with any sort of competition. Despite the brash claims coming from various US-based oil barons about the US becoming the new global swing producer, the shale oil sector was never going to seriously challenge Opec.

However, many members are panicking about how North American unconventional oil is going to impact on the market, especially if Washington agrees to lift its 1970s-era export ban.

What Opec members always seem to forget is that no producer can ever correctly guess the future oil price. Instead of trying to second guess something beyond their control they would be much better served dealing with the variables that they can control.

The only problem for Opec is that one of these key variables is building a loyal customer base through reliable supply and competitive prices. In today’s pluralistic oil market this means that cartels go out of the window and it is the responsibility of the producers to build their own markets.   

With Iran waiting in the wings to dump tens of millions of barrels into the global market as soon as sanctions are lifted, there is every chance that the price could veer downwards once again by the end of the summer.

By September the “fair” price Opec officials are so fond of talking about could be the current price of $60 a barrel. With US shale oil producers being able to ramp up as much as 3 million b/d as soon as the oil price even approached $70 a barrel, there is no escaping the fact that every producer needs to adapt to this new low price hegemony.    

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