Dow Jones
London
Opec’s next meeting at the end of November is set to be one of the oil-producing group’s most fraught in years, as it grapples with falling oil prices.
But is there anything Opec can realistically do to send oil prices back up?
Despite a small recovery on Friday, oil prices’ slide has been precipitous. The global benchmark Brent crude has fallen by over a quarter since early June, to around $86 per barrel.
During past oil slumps, the Organisation of Petroleum Exporting Countries often cut supply to try to support prices. In 2008, as the financial crisis caused a collapse in demand and oil spiralled downwards, the group slashed 4.2mn bpd from its output quota over a series of tense fractious meetings, ultimately stabilising the market.
The 12 countries that make up Opec still collectively pump around one third of the world’s oil supply, with Saudi Arabia the dominant producer.
But new supply from North American shale oil projects and other non-Opec producers has weakened the group’s hold over the market.
“Opec’s days as a group with pricing power are over,” said oil brokerage PVM’s David Hufton in a note.
Any Opec supply cut would have to be in the order of 1mn barrels of oil per day to balance market supply and demand, analysts estimate. Last month it produced 30.7mn barrels in total. However, the International Energy Agency forecasts demand for Opec oil will be some 1.4mn bpd lower next year, at 29.3mn bpd.
The Paris-based energy watchdog also expects non-Opec production to rise by 1.2mn bpd in 2015. In other words, even if Opec did agree to a large cut to balance the market, it would only be making room for competing oil volumes. And if non-Opec supply grows faster than expected next year or demand weakens further, it might only have to cut again.
Moreover, by artificially supporting prices now Opec would only help to incentivise more production from rival places like North America: most shale oil projects needs oil prices at around $70-$80 to break even, analysts estimate.
So it appears more in Opec’s interest to let markets take their course right now.
“If oil prices come off now it will slow US production and eventually demand will recover,” says one oil trader. “That could set the stage for a bull market in two years’ time.”
Opec could not immediately be reached for comment.
