After 40 years of playing the role of a swing producer to balance oil supply and demand, there by influencing prices, Opec is now all but content to have taken a back seat. It’s now just a forgone conclusion that the producer group will stick to its strategy of defending its oil market share over pries at its scheduled meeting on Friday. Opec will hold output levels at 30mn bpd, according to a Bloomberg survey.
A 40% jump in oil prices from a six-year low in January has vindicated the Saudi Arabia-led Opec strategy to keep pumping despite a supply glut against the US shale oil boom and force higher-cost producers out of the market.
Global oil prices plunged around 23% in the one month since Opec decided on November 27 to maintain its output level. Prices are still 40% down over the last 12 months.
For the oil-driven economies of Opec members - the Gulf countries in particular – lower energy prices present a stark contrast. Kuwait can balance its budget at a price of $47 a barrel (lowest among Opec members), while Qatar is comfortable at $59. Saudi Arabia, which accounts for 33% of Opec production, needs $103, according to International Monetary Fund estimates. But at the other extreme end is Libya. The African country now needs a huge $215 to put its war-ravaged public finances in order.
If Opec, as seen in the US, is indeed looking to drive new producers with higher costs - particularly US shale players - out of the market, signs are the effort has met some initial success. The US shale boom, which has brought the country closer to energy self-sufficiency than at any time since the 1980s, has been challenged in 2015 like never before. The US oil rig count has been sliced by more than half since November and now stands at 646.
Amid the battle for market share, falling prices, for sure, can unsettle the demand-supply balance in the long-term. The Big Oil has trimmed the 2015 capital budget and near term, projects worth more than $150bn are likely to be put on hold. The result is higher energy costs and fewer alternatives once global demand revives.
There is, however, one consensus: No longer does Opec look to enjoy the dominant market role. The alliance, rather, might want non-Opec members to bear the brunt with a joint-production cut in future.
The “Opec demise” theory is too far-fetched, though. The US currently accounts for just 10% of global crude production. The 12-member Organisation of the Petroleum Exporting Countries, led by Saudi Arabia, still produces around 40% of the world’s oil and hold 80% of its oil reserves, making its every move significant.
The alliance now has learned to live with the new reality: Opec is still relevant, but in different ways. But the oil market will never be the same again.