Saudi Arabia and the other big Middle East oil producers in OPEC will keep pumping hard to build market share despite mounting over-supply that has brought prices to six-year lows, the world’s top traders say.
The Organization of the Petroleum Exporting Countries probably will not change tack and trim output even if it means prices stay low for a long time, senior executives from Vitol, Trafigura and the other big commodities houses said.
“I’m expecting OPEC to be quite consistent in this position,” Trafigura Chief Financial Officer, Christopher Salmon, told the Reuters Commodities Summit.
OPEC ministers meet in Vienna on Dec. 4 to decide production policy and are likely to see sharp disagreements between rich Gulf countries with low production costs and poorer members such as Venezuela that need higher prices to meet their budgets.
Caracas has proposed that the cartel, source of more than a third of the world’s oil, adopt a price band with a floor around $70 a barrel and has suggested OPEC and non-OPEC producers cooperate to support prices.
Venezuela, Nigeria, Algeria and several other OPEC members need oil prices well over $100 barrel to cover their costs – twice the current crude price below $50.
But core OPEC members in the Middle East have much lower costs and are more worried about losing market share to shale producers in the North America. They hope lower prices will squeeze out their competition and boost prices in the long term.
“There is bound to be a huge amount of pressure on the Saudis from one or two people at that meeting to look at this policy again,” said Ian Taylor, chief executive of Vitol, which traded more than 2 billion barrels of oil last year.
“I cannot believe they will want to change their strategy at this moment in time, but you can’t rule it out totally … I never like to pre-judge an OPEC meeting. You do that at your peril,” he said, adding: “Do I expect a change? Probably not.”
Gunvor Chief Executive Torbjorn Tornqvist agreed, saying the group was unlikely to cut production any time soon.
Marco Dunand, chief executive of trading house Mercuria said OPEC had decided to let prices find their own level:
“The way they’re looking at it, they’re saying in the longer term, you better let the market rule the price, Dunand said.
“That’s their new philosophy,” he added: “The price is curing the problem.”
The trading companies also think that OPEC can probably manage to make some space for Iran, which looks set to increase output early next year after sanctions, imposed over its nuclear programme, are lifted.
Meanwhile, Tehran says it can raise output by 500,000 barrels per day in the first week after sanctions are lifted.
Iran may be optimistic but traders say it will certainly accelerate oil sales rapidly once foreign investment is allowed to return. Sanctions halved Iran’s oil exports to around 1.1 million bpd from a pre-2012 level of 2.5 million bpd.
And it is likely to cap oil prices, that Taylor said would struggle to trade above $60 a barrel next year.
Salmon at Trafigura said Iran would need very high levels of capital expenditure in order to boost production and oil markets already reflected expectations of higher Iranian supply.
“I think the market has already factored in the likely increase into the price,” Salmon said.