Four ways for OPEC to react amid falling oil prices

By: Aygun Badalova

Oil prices keep on falling on the world markets with Brent now at slightly over $86 per barrel and WTI at almost $83 per barrel. This is roughly a 25-percent decline from their peak in June ($106 per barrel) and at the same time a four-year low.

Descending tendency in oil prices has already caused concerns among OPEC member states and the countries that are highly dependent on oil exports. Only some countries may be exception from the list, and Saudi Arabia is among them.

The country – the world’s largest oil exporter – with its huge oil reserves ad incomes may remain invulnerable to low oil prices. Saudi Arabia is no longer united with other OPEC members in their decisions regarding oil production quotas. This time the country again refused to cut its oil production level in order to enable for oil prices to slightly recover.

Russia and Iran are the countries whose economies will feel the most negative effect of the low prices. In particular, Russia’s 2014 budget was calculated proceeding from the oil price of $93 per barrel. In September the country’s ministry of finance said that Russia’s economy lost two percent of GDP in the third quarter as the result of a drop in oil prices from $110 to $93 per barrel.

However, Iran, which always considered $100 per barrel as the ideal price for oil, this time changed its position by saying that it can live with lower oil prices.

The Islamic Republic’s Oil Minister Bijan Namdar Zanganeh recently said that there is no need and plan for OPEC to hold an emergency meeting regarding the fall of oil prices. At the same time Iran’s ex-OPEC governor Mohammad-Ali Khatibi said that the organization needs to take action in order to prevent oil prices from falling any further.

“Oil revenues are vital for Iran’s economy, therefore we need to increase prices by any means,” he said.

It is worth to admit that low oil prices’ negative effect on Iranian economy will be significant. The country’s current year budget envisages the price of $100 per barrel.

The issue of whether to keep or cut OPEC’s oil production quotas will be discussed in late November. Cartel’s current production quota amounts to 30 million barrels per day (mbd). OPEC holds 60 percent of the world’s oil reserves and 30 percent of supplies.

To stabilize prices at current levels or push them higher, there needs to be a supply adjustment from the OPEC members, analysts from the U.S. bank JP Morgan believe.

“However, since OPEC adopted a collective target of 30 mbd in November 2011, no producer can be held accountable for deterioration in the market conditions. Thus OPEC members are jointly responsible for ensuring market stability, and recent pricing decisions by MEG (Middle East Gulf) OPEC members may be seen as forcing the issue of burden sharing onto the negotiating table in the November meeting,” the analysts said in a report obtained by Trend.

Competition to preserve market share raises the prospect that OPEC members will be unable to reach an agreement on how to share the burden in an egalitarian manner, said analysts.

If OPEC can agree to withdraw production from the market, the analysts estimate a cut of one mbd would be necessary.

However, given the inevitable time lag between a decision and its implementation, and the risk that OPEC fails to agree how to share any reduction in the output, further downside price risks remain, they believe.

JP Morgan’s analysts think that the likelihood of OPEC agreeing to reduce output in November is around 60 percent.

Failure to do so would suggest continuation of the over-supplied market conditions that have characterized third quarter of this year and contributed to weaker prices.

“The crucial question is who cuts production and by how much. In recent years, most OPEC members have had little or no spare capacity. Thus, increased demand for crude, either due to demand growth, or loss of supplies elsewhere, e.g. from Syria, South Sudan, Iran or Libya, has been largely met by Saudi Arabia. In the third quarter of 2010, when OPEC last produced 29.4 mbd, Saudi Arabia’s output was 8.3 mbd – 1.2 mbd below our 4Q 2014 estimate,” the analysts said.

Overall, the experts see four scenarios for the upcoming OPEC meeting. First one is that no agreement will be reached, which will cause further decline of oil prices with the probability to reach $65 per barrel.

The second scenario is that OPEC agrees to reduce production by 0.5 mbd. In this case oil prices could fall further in the short-term, but likely by less than $5 per barrel. Depending on the speed of implementation, prices may go up slightly later and remain within the range of $80-$90 per barrel broadly through the first quarter of 2014.

The third scenario is that OPEC agrees to cut production by one mbd. In that case prices will likely tick up higher than $10 per barrels.

And the last scenario is that OPEC agrees to cut by 1.5 mbd. Such scenario could potentially lead to the prices reaching $100 per barrel at the end of Q3 of 2015.

SOURCE: AZER NEWS

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