The OPEC oil cartel will be forced to call an emergency meeting within weeks to stabilize the market if crude prices fail to rebound after crashing to eight-year lows of $35 a barrel, two member states have warned.
Emmanuel Kachikwu, Nigeria’s oil minister and OPEC president until last week, said the cartel was still hoping the oil market would recover by February as low prices squeeze out excess production from US shale, Russia and the North Sea. But nerves are beginning to fray.
“If it doesn’t, then obviously we’re in for a very urgent meeting,” he said. Indonesia has issued similar warnings over recent days, suggesting the OPEC majority may try to force a meeting if Saudi Arabia’s strategy of flooding the market creates a deeper crisis.
The comments came as Brent oil plunged to US$36.76 on the fall-out from OPEC’s deeply-divided meeting earlier this month. It is now within a whisker of its Lehman-crisis lows in 2008. West Texas crude dropped to US$34.54 before rebounding in late trading.
Oil prices edged higher on Tuesday as a slump to near 11-year lows in the previous session whetted investors’ buying appetite but a lingering supply glut kept prices near troughs last seen during the financial crisis.
Brent crude, the global benchmark, had risen 55 cents to $38.47 a barrel by 1253 GMT, having touched an intra-day high of $38.95. U.S. crude was up 31 cents at $36.62.
Lower quality oil is already selling below US$30 on global markets. Basra heavy crude from Iraq is quoted at US$26 on Asia, and poor grades from Western Canada fetch as little as US$22. Iran’s high-sulphur Foroozan is selling at $31.
The oil market is now in the grip of speculative forces as hedge funds take out record short positions and exchange traded funds liquidate paper holdings, making it extremely hard to read the underlying conditions.
Anton Siluanov, Russia’s finance minister, said his country was bracing for the worst. “There is no defined policy by the OPEC countries: it is everyone for himself, all trying to recapture markets, and it leads to the dumping that is going on,” he said.
“Everything points to low oil prices next year, and it’s possible that it could be US$30 a barrel, and maybe less. If someone had told us a year ago that oil was going to be under $40, everyone would’ve laughed. You have to prepare for difficult times.”
The rouble fell to 71 against the dollar, helping to cushion the blow for the Kremlin’s budget but further eroding Russian living standards. Elvira Nabiulina, the head of Russia’s central bank, said the authorities were now preparing for an average price of US$35 next year, a drastic cut even from the earlier emergency planning.
Bank of America says OPEC is effectively suspended as Saudi Arabia wages an internal price war against Iran, its bitter rival for geo-strategic dominance in the Middle East.
Mike Wittner from Societe Generale said the Saudis floated a proposal at the OPEC summit for a 1 million b/d output cut if Russia, Iraq, and others join in chiefly in order to demonstrate to critics at home that no such deal can be forged.
He said the strategy to flood the market was not taken lightly and has support from the “highest possible level.” Part of the goal is to discourage energy efficiency and deter investment in renewables.
OPEC is not due to meet again until June, but by then its members could be facing fiscal crises. Even Saudi Arabia is freezing public procurement and drawing up austerity plans to rein in a budget deficit near 20 per cent of GDP. OPEC revenues have collapsed from $1.2 trillion a year in 2012 to nearer $400 billion next year, if prices stay this low. JP Morgan said the latest fall is likely to boost global economic growth by 0.3 percentage points next year.
Yet the situation is fraught with hazard. Saudi Arabia has stopped acting as the “central bank” of the crude markets. Spare capacity has fallen to wafer-thin levels. Any serious political upset in a country like Iraq — or a terrorist pipeline attack in the Gulf — could trigger a violent reversal and a global oil shock. On the other side of the ledger, Chinese oil demand is booming.
The paradox of the oil market is that a glut disguises the tightest balance of supply and demand in modern peace-time history.