‘OPEC can easily decide to do nothing about oil prices’
RT:Oil prices are at a record low. How would you explain the decline?
Stuart Elliott: Oil prices are now at an average four-year low, this has been triggered in the last four months by an unprecedented increase in oil production in the US. This has been coupled with weaker demand growth across the world, especially in Asia and Europe. This has caused the price to fall by more than 30 percent. So really we are looking at a price that we haven’t seen for a quiet of a few years now.
RT:OPEC states are gathering next week. What do you expect from the meeting?
SE: OPEC which is made up of 12 producer countries in really the only organization that can impact on supply across the world. They will meet next week in Vienna on Thursday, the ministers from each country, and they’ll decide what to do about their production policy. At the moment collectively they have a ceiling on their production that is 30 million barrels a day. But they have been overproducing that ceiling for the last few months and they themselves have said that next year, in 2015, there won’t be as much need for the OPEC crude on the market. In fact, they predict that there will only be a need for about only 29.2 million barrels a day of OPEC crude on the market. So they themselves recognize that probably their ceiling is too high, but obviously if they were to cut production, then they would make even less money from the oil they do export. There are probably three scenarios that we could see coming out from the meeting next week. One is that they leave the ceiling alone; they don’t do anything, which would probably trigger a further price fall. Two, they make sure that they stick to the 30 million barrels per day very firmly so that everybody agrees “We cannot produce more than that.” Or they decide to cut [production], which would be the only way really we could see the price increase because if OPEC says, for example, “We are going to take a million barrels a day from the market,” leaving them producing 29 million, then that will probably leave the market a little bit tighter and prices would rise.
RT:What kind of strategy can we expect from the OPEC members?
SE: This is a perfectly rational probability that OPEC will meet on Thursday and the member states would decide “Look, demand for our crude maybe lower at the moment,” but who is to say when it will increase the next year or next two-three years? There could be a big supply disruption anywhere in the world. You can see the US production falling off, Russian production could come down. So OPEC is in a position where they could easily decide to do nothing. If that does happen, and there are no other disruptions to oil supply across the world, it would be reasonable to assume that oil price would continue to fall because of simple dynamic of supply and demand – if there is too much supply and not enough demand, prices come down. That would of course be good for consumer countries if cheap oil in places like Europe means that people have more money to spend on other things, industry would benefit. But the losers are the exporters – countries like Russia, Venezuela, and Iran – who rely on petrodollars, who rely on the income from oil. They will see their economies really start to struggle and perhaps [fall] even into recession if the price falls any further.
RT:Do you think that OPEC is united in its stance on oil prices, or is every state prioritizing their own economic and political goals?
SE: OPEC is a diverse group of countries and they all have their own strategic priorities. Normally in this kind of situation you would see Saudi Arabia come forward in its traditional role as a swing producer. That means that Saudi Arabia is the only country really in the world with any spare production capacity. So when the prices are high, they can theoretically put more supply on the market to ease the price, and conversely when the prices become too low they can take oil off the market. So that is what Saudi Arabia traditionally will do. But we have heard signals from them in the last few months that they don’t want to do that this time that they are happy to continue producing as much as they want to serve their own needs. When you have countries like Iran or Venezuela that depend on oil exports for most of their foreign revenues, who have called for cuts – they said “We need to reduce supply collectively as OPEC, otherwise prices will continue to fall and we are going to lose all our flood of money” - it does look from the outsiders that OPEC is perhaps slightly divided and there are some countries who are happier than others to continue with a lower oil price. That would certainly be a factor in the talks. In fact they have already begun as we have seen Venezuelan Foreign Minister Ramirez doing tours of some of the Middle Eastern countries, probably trying to persuade them to come on board and support a production cut.
RT:Some experts blame the oil price plunge on geopolitical factors rather than on natural supply-and-demand ones. What do you make of that?
SE: Oil market works on fundamentals. Oil market is different in some ways because of the geopolitical elements into it. But you can’t argue with the data on this one, which is that the US production growth of oil has outpaced demand growth in 2014, it is just a clear sign that the market is oversupplied. Add to that Libya which was producing only about 200,000 barrels a day back in April-May this year got back up to a million barrels a day at the end of October. This is a kind of extra 800,000 barrels per day on the market. It looks to me you can’t argue with the numbers – there is too much oil on the market, demand is much weaker. Chinese demand growth, which is often a big signal for oil prices, has weakened significantly in the last year. The IEA, the energy watchdog based in Paris, has said the Chinese growth continues to weaken. There can be speculations on the strategies of countries and geopolitics involved in this, but at the end of the day, to me it looks like fundamental issue of supply and demand.
RT:The US is actively developing shale gas and oil production. How could this general decrease in oil prices influence the US economy?
SE: Important to remember that the significant increase in US oil production has been boosted by unconventional production – shale oil, tight oil production… but it’s expensive to produce and the estimates for the break-even of that oil vary quite widely actually. Some people say $80 per barrel is the level where questions start to be asked about whether or not it is economic to produce at that level. Some of the estimates go down to as low as $40 per barrel so you can carry on producing profitably - tight oil, shale oil for $40 per barrel. Estimates are very different. What is clear is that the lower the price goes, and at the moment we are seeing the US benchmark WTI just over $70 per barrel, there is going to be a lot of calculations being made to check and see whether or not it’s economic to carry on producing. OPEC itself has its own studies, and they say that half of the US tight oil production could come off the market at the level of $80 per barrel. But some of the US companies have said that it could be $40-50. We haven’t really seen any evidence yet of US companies shutting in production but if they are to guarantee prices of $70 per barrel, we will start seeing it quite soon.
The statements, views and opinions expressed in this column are solely those of the author and do not necessarily represent those of RT.