OPEC has no choice or alternative other than to continue with the reduction of 1.2 million barrels for another six months. It must work with Russia and have its concurrence. Without such an agreement, the oil prices will hit less than $50 in no time despite the current hot, alarming and hostile situation in the Gulf region.
The market is full of oil from almost every corner, and everyone is aware that it is almost impossible to stop the oil fl ow from the Gulf to the world. However, it is essential to have Russia’s blessing to continue with the oil reduction for at least the rest of the year.
Time has come for OPEC members to address the real issue of the continuously increasing supply of crude oil from non-OPEC countries, shale oil from USA, Canadian oil and Russian oil and from other smaller producers. Two major OPEC oil producers – Venezuela and Iran – are not exporting much crude oil, with less than 1.1 million barrels per day, because of the USA embargo/ boycott. Imagine if these two countries were doing the maximum volume of export, which is in the range of about 4.2 million barrels! This would mean further and deeper OPEC cuts resulting in lower price perhaps in the range of $50, which could be the single price level next year.
OPEC must seriously address the issue of volume and price. They cannot shut down their producing oil wells just to absorb the cuts, and bear the cost of shutting down their wells. For how long will OPEC members cave in while other producers are eating into their market shares? It was recently witnessed that Russian oil companies have been complaining bitterly to their government about the agreement with OPEC for production cuts of about 300,000 barrels per day. OPEC can no longer manage the crude oil supply volume.
It can no longer influence the flow of oil to be effective as used to be. It looks like OPEC is losing that huge infl uence which is going back again to the major oil producers of USA shale oil, particularly back to the major oil companies. Or OPEC has to go to war with other producers, risk the falling of oil prices to below $40 per barrel, test the market again, and let the strongest survive, as OPEC are the lowest cost producers.
The question remains – Who will fill the huge budget gaps of more than $35-$40 per barrel? Are the OPEC governments ready, especially in the absence of any real financial alternatives? Nevertheless, the decision of the OPEC meeting next week is crystal clear – unanimous agreement for production cuts of 1.2 million barrels without any question.
By Kamel Al-Harami Independent Oil Analyst