RIYADH: With oil prices rebounding from the lows, a drop in US rig count signalling a decline in shale output and the possibility of non-Opec producers working in tandem with Opec to stabilise the markets, there seems to be a growing consensus that Opec at its ministerial next Friday will opt — yet again — not to cut output.

The strategy of elbowing out high cost producers is showing some signs of success, as global oil companies have slashed their capital budgets by up to 40 per cent, and the once-booming US production appears to have levelled off and begun a slow decline.

The feeling in Opec headquarter in Vienna also seems against any change in direction. In a draft strategy document presented to the delegates, Opec analysts point to stubbornly high output from non-Opec sources and sluggish demand, which they say will reduce its market share to 28.2 million barrels per day (bpd) in 2017 from 30m bpd last year. Opec is currently producing 31m bpd.

“Since June, 2014, oil prices have experienced a significant reduction, reaching levels even lower than the crisis experienced in 2008, yet non-Opec supply is still showing some growth,” the strategy paper pointed out.

“Generally speaking, for non-Opec fields already in production, even a severe low price environment will not result in production cuts, since high-cost producers will always seek to cover a part of their operating costs,” the report said.

“For future non-Opec production, only expectations of an oil price environment in the long-term, below the marginal cost of production may deter substantial non-Opec developments. Most Opec delegates are beginning to recognise the fact too. Opec is unlikely to change its production ceiling when the group meets in June, Iran’s Oil Minister Bijan Zanganeh, who until recently has been insisting on an output cut conceded last week.

“Lowering Opec’s production ceiling requires consensus between all members... under current conditions it seems unlikely that the Opec production ceiling will change,” Zanganeh said. Earlier in April, Zanganeh has insisted that Opec should cut its output target by at least 5 per cent, or approximately 1.5m bpd.

“Prices are improving, growth in supplies from outside Opec — especially shale oil — is lower than before and demand is recovering,” Kuwait’s governor at Opec Nawal al-Fuzai told reporters last week.

Many in Saudi Arabia also don’t expect any dramatic reversal in policy direction at the upcoming moot. Opec is not expected to cut oil production at its meeting in June, Al Hayat reported quoting an unnamed Opec source.

“Preserving market share still remains a top priority for Gulf states,” Saudi economist Abdulwahab Abu-Dahesh was quoted as saying by AFP.

“I don’t think that any change will happen at Opec’s meeting,” a former member of Kuwait’s Supreme Petroleum Council, Musa Maarafi, quipped.

“Gulf States will continue to defend their market share and it is their right to do so,” he added.

Analysts outside the region too appear concurring. “Dramatic cuts in spending and drilling are finally having an impact, so why on earth would Saudi Arabia change course now, their strategy is just starting to bear fruit,” Mike Wittner, head of oil research at Societe Generale SA, was quoted as saying. “Anyone who expects anything to happen at this meeting is going to be sorely disappointed.”

“Opec doesn’t really have a need to change course,” Francisco Blanch, Bank of America Corp.’s head of commodities research, said on May 18.

All but one of the 34 analysts and traders surveyed by Bloomberg said the Organisation of Petroleum Exporting Countries (Opec) will maintain its daily production target of 30m barrels a day when it meets in Vienna.

Yet the challenge to strike a balance between the desire to hold on to market share versus the push of some of the group members to cut output so as to support the weak markets would continue to haunt the ministers in Vienna next Friday. To say the least — the task in hand is ominous.

Published in Dawn, May 31st, 2015

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