Saudis unlikely to change OPEC output policy
June 4, 2015, 4:44 am

United Arab Emirates Minister of Energy Suhail Mohammed Al-Mazrouei attends the Organization of the Petroleum Exporting Countries (OPEC) ‘s 6th International Seminar (with major energy companies) in Vienna two days ahead of OPEC’s Summit of members [Xinhua]

But that’s very unlikely.

Despite current uncertainty over energy futures in global markets, OPEC will continue to maintain current policy; in December, the cartel decided not to interfere in falling prices and refrain from cutting production output.

Major oil producers such as Texaco, ConocoPhilips, have since January expressed concern as they see their profits slashed; market estimates are that oil company earnings were cut by 50 per cent in the first quarter of the year.

Meanwhile, British Petroleum (BP) and other oil conglomerates announced earlier this week that they would cut the number of management employees and scale back on investments in the oil sector.

It’s the instability, stupid

Major oil companies have the initiative and monies to pour billions into long-term investments – that’s not been the problem. The challenge is that the current energy market provides almost no assurance which way oil prices will go.

The Saudis, who effectively lead OPEC as the largest producer and exporter, traditionally worked toward market stability. But since the shale oil boom, the Saudis may have changed track, preferring to allow markets to determine the price of a barrel of oil.

To some, it appears that Saudi Arabia fears the US growing shale oil industry and is trying to weaken it.

In essence, Saudi Arabia is investing in market instability because it believes that at least in the short-term this maintains its market share in the global oil industry.

If this is indeed the case, it may already be working.

Even before the latest oil price tumble, companies investing in shale oil production started to fear a dwindling profit margin and began to scale back investment in this energy sector, as well as in the number of active oil rigs. For the first time in four years, US shale output fell in May.

Shale investor ConocoPhilips, for example, has already slashed its budget by more than 20 per cent.

As a result, when OPEC meets on June 5, the world is likely to expect more of the same trends seen in the past nine months. This does not bode well for oil conglomerates looking for hints where to invest next year.

In the meantime, some oil-producing heavyweights such as Saudi Arabia, Iraq and Kuwait may have actually increased production in the past few months.

The current quota for the 12-member OPEC oil cartel was set at a sum of 30 million barrels a day in 2011. OPEC production in April 2015 was just short of 31 million barrels a day.

But Libya, which has resuscitated its production levels upward, and Iraq, have both increased their output. Iran has said it wants to increase its output, too.

The BRICS Post with inputs from Agencies