Any doubt that OPEC has lost control of the global oil market vanished on Thursday, when the alleged cartel made a few bland statements at its Vienna meeting that amounted to nothing. Not knowing which way to turn, oil buyers and sellers left their investment strategies intact and the oil price, at just under $50 (U.S.) a barrel, barely budged.
For decades, the Organization of Petroleum Exporting Countries did a credible job in manipulating the market in its favour, even if several of its members were, to varying degrees, serial production-quota cheaters. No more. Open the spigots! It's every OPEC member for itself. What will determine prices in the future is not OPEC strong-arm tactics, but market forces.
Assuming those natural market forces will prevent the price from soaring and staying high, as they do in other commodity markets, like coal and iron ore, the winners will be the low-cost producers, and that group does not include Canada.
The Vienna meeting revealed no sense of unity among the 13 OPEC member states. There was no new agreement on an output cap. The strongest statement that Khalid al-Falih, Saudi Arabia's new energy minister, could muster was that the time had come for OPEC to "steward the market," which is what was it was supposed to be doing anyway, but never mind.
Speaking just ahead of the OPEC meeting, he went on to say that, "Whatever action we take will be taking into consideration that the market is doing quite well by itself, so we will be very gentle in our approach."
OPEC is a dying lion, living on its fearsome reputation but a threat to no one, for all sorts of reasons.
While it nominally accounts for about 40 per cent of global oil production, two of the biggest oil producing countries, Russia and the United States, are not OPEC members. The effective leader of OPEC, Saudi Arabia, is thought to be producing flat out, or close to it, meaning its ability to leverage its traditional position as the main swing producer, and move prices up and down at will, is vastly diminished. Iran has no interest in a production quota and, unless it agrees to one, Saudi Arabia cannot possibly endorse output constraints. Iran has been producing about 3.8 million barrels a day since the sanctions against its oil industry were dismantled in January. Its stated goal is 4.7 million barrels a day.
The lack of solidarity among OPEC members verges on the cruel. The strongest members apparently have no interest in propping up the oil price to bail out the weak or failing members, dubbed the Fragile Five by RBC and other investment banks: Venezuela, Nigeria, Libya, Iraq and Algeria.
"Saudi Arabia seems unmoved by the plight of the poorer OPEC producers," RBC's Helima Croft and Christopher Louney said in a recent report.
Oil has been on a roller-coaster ride since mid-2014, when it traded at about $110 a barrel. It dropped under $30 in January and recently pierced $50, before retreating a bit. In recent days, all momentum has stopped. The question is whether $50 is the new price floor or price ceiling – and there is no way of telling. What seems certain is that supply disruptions within the OPEC and non-OPEC countries will influence the price much more readily than any attempts, or lack thereof, by OPEC to manipulate production.
In the near term, the biggest risks to supply are the Fragile Five. Near daily attacks by the armed militant group Niger Delta Avengers have sent Nigerian oil production plummeting. Venezuela, home to the world's largest reserves, is on the verge of economic and social collapse. Unless China comes to its financial rescue, its oil exports could sink. Libya is another wild card. The country is still stuffed with marauding militia groups, one of them being Islamic State, which has attacked oil installations in eastern Libya.
Offsetting the production shortfalls in Nigeria, Libya and elsewhere is rising production in Iran and Iraq. With OPEC losing the power, and will, to set global prices, coupled with Saudi Arabia's desire to choke off U.S. shale oil output (mission partly accomplished), it is competitive forces that will shape the price of oil. More competition suggests that oil's trading range will be narrow, even if it could rise or fall considerably. The laws of supply and demand tend to flatten the peaks and troughs of any commodity.
This is bad news for the high-cost producers, notably Venezuela, Nigeria, Canada and a good number of the U.S. shale oil producers. When oil prices are low, the biggest winners will be Saudi Arabia and the Gulf states, where pumping costs are a few bucks a barrel. The current price is probably not high enough to save Venezuela and Nigeria and may not be high enough to prevent a slow grind-down in the Canadian oil sands. For them, the glory days of OPEC and its price-bolstering muscle are but a fond memory.
Eric Reguly