Date: 11 Nov 2014, Economics and Finance
Question setter: Mettletest Panel

OPEC Oil production

Will OPEC agree to lower its production target of 30 million barrels a day when it meets in Vienna on 27th November 2014?


Response:


Answer: Yes
Confidence level: 40%
Mean confidence level (all requests): 43.33%

Justification:
Brent prices have fallen from 2014 highs of $115 and a sustained 2 years with barely a dip below $100 to the low $80s. This has a profound effect on many OPEC members who need high prices to balance their budgets and meet their social spending commitments. These countries will put huge pressure on Saudi Arabia and the other low production cost gulf states to cut targets and revive prices. They will have to sacrifice some production themselves but probably reckon to cheat on their quotas once a deal is done.
To date, Saudi Arabia has wanted to maintain its market share and has cut prices to the US. They want to compete with and discomfort the shale producers who present a new challenge to the cartel. The price at which these newcomers lose heart has not been tested yet and Saudi may feel it can put the squeeze on and benefit from price recovery in a few years time. However, in this scenario, the market will continue to go lower and sentiment will be negative as the strong output and lower global economic activity create surpluses. Although the fundamental balances have changed very little, perceptions have and fears of shortage are evaporating. OPEC could be forced into cuts by further price weakness and the clamouring of its failing members.

Outcome: No
Score: -40
Mean score (all respondents): 11.67

Expert opinion:


Answer: No

Selected Expert Answer from Sir Jeremy Greenstock:
OPEC has only rarely, even in its heyday, been disciplined enough to agree a tactical reduction in production volumes. It is now well past its heyday because of the strength of non-OPEC production and particularly of US shale. Arguably it is the latter that has become the No1 swing producer rather than OPEC.

Recent moves in the market by Saudi Arabia, for instance, offering discounts to Asian customers, suggest that Riyadh wants it to be known that the Saudi Government can make things difficult for other OPEC producers if cartel discipline is lost. That may concentrate minds in the OPEC meeting later this month.

More likely, however, is a failure to reach agreement, because OPEC's pricing power has diminished. 27 November will not see an agreement on a lower OPEC production target.

Answer: No

Selected Expert Answer from John Karslake:
Oil price falls of nearly 30% have led to calls for production cuts to restore levels above $100 a barrel. Saudi Arabia is the dominant force within OPEC and they see their best interest in maintaining market share, faced by increasing competition from US shale oil. They have shown clear intent by lowering their selling prices and have stated that they are not prepared to act as swing producer. Saudi may feel it could bear short term weakness and that a medium term price recovery will be achieved by squeezing out marginal (shale) producers and creating uncertainty about the viability of some new fields. There will be desperate efforts from non-Gulf members to persuade Saudi to help them. Venezuela is close to bankrupt and needs oil over $120 to balance its books. Other members are in varying degrees of distress and need every petro-dollar they can grab. Of course, they do not wish to be the ones to cut production. Social spending is the driver, not the marginal cost of production that rules the shale companies. Nigeria is already pumping only 2m bpd out of an expected 2.4m. Iraq and Arab Spring nations want to build $ reserves. Yet Saudi and the Gulf States are unlikely to yield unless prices sink further. The most likely outcome is agreement to enforce the current 30m target.

Answer: Yes

Selected Expert Answer from Mettletest Panel:
There is a strong view that only the gulf state members of OPEC are amenable to seeing production levels stay at 30m + bpd, whatever the price effect and prices have fallen fast already. Saudi Arabia, as the cartel leader, is not prepared to take the burden of cuts on itself. It has $ reserves of 745bn and can weather what it considers to be a temporary price fall. It may even have a strategy to pressure high cost producers out of the business and certainly wants to maintain market share. Other OPEC members (especially Latin American) are squealing, as they have been relying on higher oil incomes to bail out their faltering economies. They want Saudi to be the swing state, essentially allowing them to maintain their own output. . OPEC has recently released its oil report showing medium to longer term price rises and recovering demand. Short-term this complacency may change the dynamics, though. The market senses adequate or surplus supplies as the global economy stutters and shale yields increase. Prices may fall further over the next weeks and below $75 pb,, so even Saudi may start to panic. Oil around $70 before the meeting will force OPEC into production cuts to halt the bearish market psychology taking hold.


Outcome: No

Comment on outcome from Mettletest Panellist:
OPEC maintained its collective target production ceiling of 30 million barrels a day.
Brent Crude futures fell $4.81 to $72.94, the biggest one day fall since May 2011. The view of the cartel appeared to be that production cuts would not guarantee a rise in prices. Saudi Arabia was not keen to be the swing producer and there was little appetite in the other OPEC members to pare their own production. Vulnerable Venezuela's calls to cut were resisted and the weaker prices will hit many producers hard. Some analysts speculate that OPEC is hoping to squeeze out high cost producers, particularly US shale oil wells, and that the group will be able to regain its control in the medium to long term. Certainly its current retreat from a dominant position is extremely significant, breaking a pattern that's lasted 40 years.