OPEC - A CONSENSUS GROUP WITH NO CONSENSUS TO DO ANYTHING
Iran announced on 30th May that it has barred its pilgrims from traveling to Mecca to take part in the annual Muslim Hajj pilgrimage, accusing Saudi Arabia of failing to guarantee the safety of its citizens.
As such tensions were simmering and this outburst was another angry reaction. Under these circumstances, if one had expected that today’s OPEC meet will give any positive results, one had to either be too naïve or too foolish. There is no way that these two minds, of Saudi and Iran, will come together. It is this personal war between the two countries which has put a big question mark on the very relevance of OPEC.
Later in the afternoon today, word came in that Saudi seems to be ready to work out some kind of deal as it is fearing this lack of consensus is making Opec irrelevant. Saudi feels that by bringing in a celing now, it will once again show the world that Opec is important and does have the wherewithal to control prices. But will Iran agree? News is that Iran wants country specific production targets and not an all-encompasisng one like it has always been. A deal would be a shocker, as world over, no one is expecting any change in stance this time around. Maybe we could see some thawing and that could set the tone for the next meet. Thus Opec could work on a deal today to restore unity, putting aside all its political differences. There is also news that Iran could be excluded from a production ceiling - if that does come through, it would be a huge victory for Opec and reinstate its place in the global oil market.
But in all likelihood, knowing how deep rooted the opposing mind set is between Iran and Saudi, a breakthrough in this meet seems highly unlikely.
Today is also the first time that the newly appointed Saudi Oil Minister, Khalid al-Falih, will attend the OPEC meet. He is chosen personally by Saudi Arabia’s deputy crown price Mohammed bin Salman. The prince is all for privatization of state oil company Saudi Aramco (headed by the new oil minister) and lower the country’s long-term economic dependence on oil.
Throughout this low price time, Saudi and Iran fought to retain their market share, none of them willing to cut production to increase prices. Saudi would have agreed but Tehran point blank refused – its economic sanctions have just been lifted and it wants to get back its market share of before the sanctions era.
Saudi had another motive behind not cutting production – the US shale gas industry was gaining a very strong foothold, threatening to nudge out the place of Saudi. It felt that if production was cut to raise prices, the shortfall in supply could be met by US – through its shale gas and non-Opec producers and that would have become irrevocable in the future. During this time, USA managed to cut down its import from Opec by over 40%, sending a strong signal – it was no longer dependent on Opec. Thus Saudi stayed put, pumping excess oil and taking a beating on price, knowing that beyond a certain lower price of crude, will make shale gas production unviable. And that is what has happened now.
But then the question which comes to mind is whether Opec has any control on oil prices? For now at least, Opec seems to have become obsolete but it is not dead. Once again, when a balance is truck between demand and supply, Opec will again emerge as very important.
So when is this ‘balance’ expected? Prediction is by Dec 2016. This is based on the US Department of Energy’s statistical arm, Energy Information Service (EIA) saying that US production could fall 8.5% in 2016 and by 13% in 2017. The EIA sees the excess global supply reaching 1m barrels a day this year, but falling to 200,000 in 2017 as consumption rises and supply falls. Thus once demand starts exceeding supply, Opec and its utterances will be back in focus.
Opec is too important an organization, rather a cartel, to fail or become irrelevant. Its currently weathering a bad storm but once this clears, it will be time for sunshine again.
India is already on a fuel price hike mode and every one to five dollar rise, will result in a price rise here. But don’t expect sharp rate cuts; prices once up rarely come down. OMCs have turned in very good performances but from FY17, the tide could once ebb.
Today’s meet has no relevance for the man on the street. But as part of the fastest growing economy in the world, surely we need to be aware. It is knowledge alone which has the power to control access to opportunity and advancement.