The Organization of the Petroleum Exporting Countries (OPEC) agreed on Friday to leave its oil output target unchanged at current levels, while adding that it would closely monitor developments over the next few months, including Iran’s return to the market.
OPEC’s policy statement left out a target number; however, when asked by reporters during a press conference, officials confirmed that the output ceiling would most likely remain around 31 million barrels per day (bpd).
“Production is changing from time to time so we have decided to postpone this decision to next OPEC meeting until the picture will be clearer for us to decide on a number,” OPEC’s secretary-general Abdullah Al-Badri said during the conference.
Market reactions
The decision came after months of speculation over its ability to maintain high production levels amid an oil slump taking its toll on member countries. It also fell in line with the expectations of most analysts, as comments from Saudi and Iranian officials this week showed no signs of a consensus on policy.
“The decision of course won’t be good news for the market as it risks new supplies from Iran, which in return may put more pressure on oil for the time being,” Noureldeen Al Hammoury, chief market strategist at the Abu Dhabi-based ADS Securities told Argaam. “In return, we might hear more and more lower earnings and most likely more oil companies acquisitions in the coming six months.”
Oil prices tumbled following the news, with Brent crude dropping 1.4 percent to $43.22 per barrel (bbl) by 12pm eastern time (ET). Meanwhile, West Texas Intermediate (WTI) crude fell by more than 2.5 percent to below $40/bbl.
Iran in focus
Robin Mills, head of consulting at the Dubai-based Manaar Energy told Argaam that he now expects oil prices to remain low for “an extended period,” with some degree of a recovery from current levels. He also warned of further depreciation when Iran ramps up oil exports after sanctions are lifted early next year.
“A gain of around 800,000 barrels per day of Iranian exports during 2016 will depress prices by $5-10 per barrel lower than they would otherwise have been,” he said.
This new reality, he says, will force GCC economies to resort to more spending cuts, draw down reserves and issue debt in the short term, adding that there would be a need to scale up efforts to diversify revenues and exports.
“Saudi Arabia will issue debt (domestic and possibly some international), and I expect it to carry out subsidy cuts. There will also be spending cuts, cancellation of some projects, and possibly privatization of some non-core assets,” Mills said.
Next steps
Looking ahead, the cartel revealed that it would meet again to evaluate the impact of higher production from Iran. It’s also planning to continue its dialogue with non-OPEC members with the aim of cooperating on a future strategy to rebalance the market.
“We are asking all non-OPEC members why we don’t yet have a joint effort to make a cut to raise [oil] prices,” Al-Badri said, adding that “by next year everybody will see how they can contribute to that effort.”
Write to Joumana Saad at joumana.saad@argaamplus.com
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