OPEC failure to reduce oil output sends oil prices crashing

OPEC failure to reduce oil output sends oil prices crashing

Thursday, November 27, 2014 10:01 pm

OPEC head office in Vienna: cartel maintains output at 30 million barrels a day

OPEC head office in Vienna: cartel maintains output at 30 million barrels a day

OPEC disappointed the international oil market on Thursday by voting to maintain its current production level of 30 million barrels a day.

It was a dispiriting decision for a market flooded with global oil supplies: prices went out of spin and collapsed by five-dollars, the biggest fall in one day for the various oil grades, since the market slump began a few months ago.

The cartel pumping out one-third of the world’s oil opted to stick by its output target, even after prices have plunged by 35 percent in value since June.

The 12-nation cartel “decided to maintain the production level of 30 million barrels per day” where it has stood for three years, the Organization of Petroleum Exporting Countries said in a communique.

OPEC Secretary-General Abdullah El-Badri said the cartel would sit tight before the next output meeting scheduled for June in Vienna, where it is headquartered.

“We have to wait and see how the market will settle,” he told the meeting’s closing press conference.

“As I said many times… we don’t want to panic.”

Going into the latest meeting, OPEC faced pressure from its poorer members, notably Venezuela, to cut output as collapsing prices slashed their precious revenues.

However, its powerful Gulf members rejected calls to turn down the taps unless they are guaranteed market share in the highly competitive arena, particularly in the United States, where a flood of cheaper oil from shale rock has contributed to the global oversupply.

“We should withdraw the overproduction from the market,” Venezuelan Foreign Minister Rafael Ramirez told reporters ahead of Thursday’s outcome.

– Price crash –

The OPEC decision sent world oil prices tumbling to fresh four-year lows.

Diezani Alison Madueke: Nigeria's oil minister:  now conference president for 2015

Diezani Alison Madueke: Nigeria’s oil minister: now conference president for 2015

New York’s West Texas Intermediate for January slumped to $67.75 a barrel — the lowest level since late May 2010.

London’s Brent North Sea crude for January delivery nosedived to $71.25 — also a four-year trough. At this level, it is more bad news for Nigeria: benchmark was fixed two weeks ago at $73 dollars.

OPEC “may have come to the conclusion that a period of lower oil prices could potentially work in the group’s favour over the longer term, given the boost it should provide to the global economy and hence to demand”, said Tom Pugh, commodities analyst at Capital Economics research group.

“Nonetheless, it seems likely that there was substantial disagreement between those members of OPEC, such as Iran and Venezuela, who had been calling for output cuts, and the Gulf members who are in stronger financial positions.”

Crude prices are being depressed also by a strong dollar and worries about stalling energy demand in a weak global economy.

The International Energy Agency (IEA) recently warned that the “price rout” was not over, and that crude futures would slide well into 2015.

Plunging oil prices have fanned concerns about the growing threat of deflation in the world economy, and particularly in the eurozone.

While falling consumer prices may sound good for consumers, deflation can trigger a vicious spiral where businesses and households delay purchases, throttling demand and causing companies to lay off workers.

Elsewhere on Thursday, the ruble slumped to historic lows against the dollar and euro — with energy-rich Russia generating about half its federal budget revenues from oil and natural gas exports.

– OPEC pumps above target –

OPEC pumped 30.6 million oil barrels per day last month, above its 30 million bpd target according to the IEA, which advises countries on energy policy.

Ahead of the meeting, OPEC kingpin and world’s top oil producer Saudi Arabia cut charges for US customers in a move seen as a bid to maintain its market share amid increasing competition there from shale energy.

OPEC has meanwhile insisted that it is not solely up to the cartel to tackle the oversupply that is sending crude prices crashing.

Officials from Saudi Arabia met with their counterparts from Venezuela and non-OPEC oil producers Russia and Mexico in Vienna on Tuesday.

crude oil: biggest fall in recent months

crude oil: biggest fall in recent months

Following the surprise gathering, Russian oil giant Rosneft said it had trimmed its daily output by a paltry 25,000 barrels because of “market conditions”.

On Thursday, the cartel appointed Nigeria to its rotating presidency for 2015, meaning the country’s oil minister Diezani Alison-Madueke becomes OPEC’s first female president.

Kuwaiti oil minister explained later that OPEC’s decision was prompted by fear of losing market share to competitors.

“Today, there are many competitors, and OPEC pumps just 30 percent of global output,” Ali Omair told local Al-Watan satellite channel from Vienna, where he attended the OPEC meeting.

“It was inevitable to take the right decision not to cut production because it can be compensated by others present in the market, who have the ability to do so.”

“Accordingly, we decided that price will adjust itself based on supply and demand and that OPEC is supposed to safeguard its market share in order not to lose its clients,” the Kuwaiti minister said.

“OPEC will no longer accept to bear the additional burden of cutting production while others rush to raise their output,” he said.

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