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OPEC Guide

A News Feature

OPEC Guide

A News Feature

OPEC faces up to new oil price reality; Badri says era of $100/b is gone

June 8, 2015 -- Staff reports in Vienna

* Upbeat approval for rollover deal
* Most members see $75/b as fair: Iran

OPEC must live with the reality of oil prices remaining well below $100/barrel, a level the market no longer recognizes, OPEC secretary general Abdalla el-Badri said June 5 as the oil producer group maintained official output at 30 million b/d for the next six months.

Badri stopped short of saying how this new reality might translate to actual price levels. Brent crude appears to have found a trading range -- for the time being, at least -- of $60-$65/b, although this falls considerably short of the $75-$80 suggestions from ministers polled over the past few days in Vienna.

Analysis continues below...

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Indeed, current Brent prices are closer to the $65/b plus-or-minus $2-$3/b preferred by key consumer India.

"Now the cycle is down, we have to live with it," Badri told a press conference. "We have to adjust to the new reality. The market does not recognize $100 anymore."

In a communique, OPEC said the sharp decline in oil prices caused by oversupply and speculation had now abated, with prices moving higher in recent months.

But it also noted that stock levels "lie well above the five-year average in terms of absolute volumes, indicating that the market is comfortably supplied."

OPEC's production since 2011

Member countries, OPEC said, had "confirmed their commitment to a stable and balanced oil market, with prices at levels that are suitable for both producers and consumers," but did not define a suitable price.

Iranian oil minister Bijan Zanganeh, however, said most members believed that $75/barrel was reasonable.

"We didn't have a discussion about price but most OPEC members think $75 per barrel is a fair price for both producers and consumers," he said.

On the surface, at least, the June 5 meeting appears to have been a relatively amicable -- the adjective used by Saudi oil minister Ali Naimi -- affair.

OPEC fault lines

But still smoldering away below the surface are the tensions that run along the fault lines of OPEC's geographical and geopolitical map.

These tensions continue to separate the richer members from those without the financial wherewithal or production capacity to help them ride the tide of what could turn out to be years of below-breakeven prices as world oil markets re-balance alongside changing supply patterns.

OPEC may be congratulating itself for having, through its November decision not to cut output despite the oil price plunge, dealt a blow to US shale oil production, which is now growing more slowly.

Over the longer term, though, shale is likely to continue to challenge OPEC, especially if the United States government decides to allow the export of light crude.

Some OPEC producers -- in particular, Nigeria -- have already been hard hit by reduced US reliance on crude imports and have had to look to Asia to find homes for their oil, intensifying the competition between producers for market share in the region.

And in the nearer term there is the potential for significant quantities of additional oil from Iran.

Iranian minister Bijan Zanganeh wanted OPEC to consider how it might accommodate Tehran's full return to the market if a nuclear deal is agreed with world powers this summer.

He told reporters Iran would be able to double its current 1 million b/d of exports by the end of the year.

There was no discussion of Iran's post-sanctions oil plans at the JUne 5 meeting, however, which means that new Iranian barrels could be rolling up at OPEC's door before the group's next meeting on December 4.

But, for now, the mood appears to be generally upbeat, with a chorus of positive remarks from the group's Gulf Arab ministers.

"You will be surprised by how amicable the meeting was," Saudi oil minister Ali Naimi said as he left the meeting.

UAE oil minister Suhail al-Mazrouei pronounced himself "very happy," while Kuwait's Ali al-Omair emerged giving the thumbs-up sign and describing the deal as "a very good one."

Qatar's Mohammed al-Sada, current alternate president of OPEC, described the talks as positive.

Price implications

Meanwhile, some analysts said June 5 that the $75-$80/b "fair" price alluded to by OPEC ministers should not be considered an indicator of where prices were actually headed.

Thomas Pugh of Capital Economics in a note said it was more likely a price OPEC members would like to see and "not necessarily what they think should happen to prices or what actually will happen."

Pugh added that there was no enforcement mechanism for OPEC to be able to influence prices towards the "fair" level, even if that does represent the price members want to achieve.

"The upshot is that OPEC appears resigned to trying to wait out lower prices in the hope that higher demand and falling production elsewhere will boost prices in the long run," he said.

"Any mention of 'fair' prices should not be interpreted as credible price targets, but more as a wish list."

Adam Longson from Morgan Stanley said he expected OPEC to maintain its current policy "for some time" given that it continued to emphasize the need for non-OPEC countries to contribute to balancing the market.

This policy also increases the uncertainty about OPEC's future as a controlling mechanism for the oil market, and "reinforces our thesis that elevated volatility and cylicality are likely to be the new norms," Longson said.

Next article: OPEC keeps its 30 million b/d crude oil output ceiling, to meet next on Dec 4

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