OPEC meet informally in Algiers next week . . .

It is widely believed that no binding decisions would be taken at the informal meeting of OPEC of Algiers on September 26th and 27th, 2016.  The price of oil is at a relatively low level on September 16th, 2016 closing at $45.99 for the Brent and $43.22 for the WIT whilst the Dollar was $1.1156 fora Euro.  According to our information, at this meeting, whilst facing energy and geostrategic global changes, OPEC informal meeting in Algiers, would be expected not to produce any major binding decisions but it will rather be the opportunity for a broad dialogue.  It will be as repeatedly highlighted in my contributions to essentially analyse the impact of OPEC in the face of the new global geo-strategic changes.  OPEC members may call for another meeting if some sort of consensus is reached at this meeting of Algiers.  It will be to discuss oil prices as explained by OPEC Secretary General.

Meanwhile, OPEC, despite its large reserves does represent only a third of world marketed production with a declining influence. According to international statistics, the ten largest producers in descending order in 2015 were :

Saudi Arabia, the United States, Russia, and China in fourth position are closely followed by Canada, Iran, the United Arab Emirates and Iraq. This latter has the capabilities of Saudi Arabia, Kuwait with Nigeria and Venezuela in 10th. Brazil, Angola, Kazakhstan, Qatar, Norway and Algeria with a quota of 1.2 million barrels per day off about 33 million of total OPEC’s daily.  Colombia, Oman and Libya, far from its potential because of civil war close the pack as members with some however respectable weigh.

The Gulf countries spearheaded by Saudi Arabia have repeatedly indicated that they would agree to cut their production only if producers outside the cartel, notably Russia whose production recently reached a record level, committed also in this way. At most, we should expect a freeze in case of agreement between Russia and Saudi Arabia and on the other hand between Iran and Saudi Arabia.  But it is generally thought that the future depends on the global economy growth, notably that of the emerging markets, Argentina, Brazil, India and especially that of China.

On the supply side, there must be taken into account, the entry of many producers, including Nigeria, Libya which could go up to 2 million barrels per day and announcing only September 15th, 2016 on the eve of the informal meeting of OPEC it will be quickly moving towards exporting 1 million barrels / day. The return of Iran with Russia would most probably dominate the Asian market.

But beware of Iraq with its potential 3.7 million barrels per day, second global reservoir and at a production cost of less than 20% as compared to its competitors) and a production that could go to more than 8/9 million, via a 4/5 million in medium-term in case of political stabilization. This would pose some discipline problems to the OPEC as Iran also is in want of return to its old quota that is over 4 million barrels a day prior to the embargo.

It is the introduction of the US shale gas / oil that has upset the entire global energetic map, that helped with state of the art technologies have substantially reduced costs for more than 30 / 40% in recent years, moving the US production from 5 million barrels a day to over 10 currently. The US in 2016 have become exporter to Europe (1) and seem not to be interested by the meeting in Algiers.

Saudi Arabia (with more than 35% of OPEC’s production and 12% of world production) is today the only producer in the world that is able to influence global supply, and therefore prices. There do not seem to be any existing geostrategic reasons of rivalries with the USA, but only tactical rivalries.  The equilibrium price will basically be determined by an agreement between Saudi Arabia and the US.  Eventually, the rebalancing of the market would depend on a number of exogenous factors that are outside of the OPEC control; Saudi Arabia for instance equilibrium price ranging between $50 – $55 a barrel.  According to the International Energy Agency (IEA) in its report of September 2016, world consumption of oil are expected to increase by 1.3 million barrel per day (MBD) to 96.1 MBD this year, against a previous estimate of 1.4 MBD from the fact that the recent pillars of growth that are China and India are “vacillating”.  A new slowdown in demand growth is anticipated for 2017, with an increase of 1.2 MBD to 97.3 MBD.  According to the IEA, supply remains steady, especially from OPEC with a near-record of 33,47 MBD in August 2016 – level or 930,000 barrel per day more over one year.  This helped to offset the production decline in third countries because of the low prices that have reduced investment, and to limit the decline in global production in August at 96.9 MBD to 0.3 MBD.  Thus, Kuwait and the United Arab Emirates have produced unprecedented levels and Iraq has increased its deliveries.  The production of Saudi Arabia amounted to a near-record level and that of Iran has amounted to 3.64 MBD, a high since the lifting of the sanctions. OPEC, in its monthly report published in September 2016, considers that the total production of the countries not part of the cartel will increase in 2017; a forecast which induces a larger than expected surplus for 2017.  Thus, the production of non-OPEC countries should increase by 200,000 barrels per day in 2017, against a previous projection of a decline of 150,000.  The OPEC report induced an average surplus of 760,000 barrels on the oil market in 2017 against a surplus of the supposed 100,000 in the previous report.  Moreover, according to international data, Russia, confronting financial difficulties, will increase its production of 2.2% over 2016 by between 546 and 547 million tonnes.

Indeed, according to a Moscow School of Economics, emergency resources established to supplement the Russian budget would be about to run out. The emergency fund would be at a level of $30.6 billion from $88.8 billion in 2014, which took in May 2016, Russia to launch a bond issue in Dollar.

Moreover, according to Reuters, citing Rystad Energy, the US have reserves of exploitable oil greater than those of Saudi Arabia or Russia, thanks mainly to shale oil, estimated to 264 billion barrels in existing fields, against 256 billion for Russia and 212 billion for Saudi Arabia. And according to the OECD, oil supply will continue to exceed demand at least during the first half of the year 2017.

We do not expect a spectacular rise in the price of oil and therefore miracles at the informal meeting which will be held in Algiers. Success would be a freeze on production, which is not obvious according to my information, the solution being to each producer margins of manoeuvres to avoid the failure of Doha.  The big problem is the frost level, if freezing there is, not to touch the countries  in situations of war and Iran, knowing that Russia and Saudi Arabia have reached a level of record production between June and August 2016.  Maintaining this level would then not influence prices.

Also all depend on discipline within OPEC, on the attitude of non-OPEC countries; the latest reports from September 2016 of IEA and the European Economic Commission is encouraging for the future of the growth of the global economy. As must be taken into account a new model of energy consumption.  In effect, the world will have to attend between 2020/2030/2040 to a new model of consumption and to a new global energy power.  According to the World Economic Forum for 2016, we should be going through the fourth industrial revolution by 2025/2040 whereby new technologies for energy efficiency in the majority of Western countries, with a forecast of 30% reduction (energy and sustainable building materials).

Each year in the world, $5.300 billion are spent to support fossil fuels, according to estimates of the International Monetary Fund (IMF) report for the COP21. However, it seems that the majority of the leaders of the world have become aware of the urgency to go towards an energy transition.  Because if China, India and the African continent had the same energy consumption of that of the US, there would be need for a five times the present planet Earth.  In the event of a change at the global level in the model of energy consumption, the level of prices of fossil hydrocarbons will be affected downward.  The two influencing factors that are growth of the global economy and the new model of energy consumption are and will remain beyond the OPEC countries.

Those who reasoning on a model of linear energy consumption as in the past, predict high prices by 2020 are making a strategic error; major investment groups are already moving into research / development in the energies of the future. It’s all over with a price of more than $ 80/90 (1).

In summary, the OPEC countries must as off now prepare their transition economics that depend on energy transition so as to avoid certain strains in their future. The only solution would be to think of a new model of energy-mix-whilst assuming to review the policy of subsidies which must be targeted coupled with action on costs to be competitive, all referring to strategic adaptation taking into account the rapid transformation of the world.

Dr. Abderrahmane Mebtoul, University Professor, Expert International,  ademmebtoul@gmail.com

Translation from French by Microsoft / FaroL  faro@farolco.onmicrosoft.com

References :

  • MENA-Forum, London – «Democracy & Development as a Dialectic Relationship with Security» by Dr A. Mebtoul | September 10th, 2016.
  • Les Afriques magazine international, Dakar, Genève, Paris,  « Le Maghreb a besoin d’une transition énergétique, 13 septembre 2016    
  • Debate on Algerian public radio in Arabic Channel 1 on the informal meeting of OPEC on September 4, 2016, from 12 h to 13 h intervention of Professor Abderrahmane Mebtoul in Paris on the price of the Brent oil and subsidies of energy products.
  • Interview on BBC London radio on the situation of the European crisis and the impact of deflation ; September 15, 2016
  • State daily El Moudjahid of September 15, 2016-“SMBs:”a strategic vision is needed” and also in the same daily “job creation: the contribution of Internet sites and social networks»
  • Interview in Paris by Chorouk TV on September 16, 2016 on OPEC’s informal meeting in Algiers
  • El Khabar – KBC in Paris  TV interview  on the meeting Prime Minister, Employers, Unions on September 16, 2016
  • Dr Abderrahmane Mebtoul is invited as an international independent expert at the informal meeting of OPEC by the Algerian Government, which will be held in Algiers from 26 / 28 September
  • Further reading on the subject is in our previous article dated August 15 and titled “Informal Meeting of OPEC in Algiers this September”  at http://www.mena-forum.com/informal-meeting-opec-algiers-september/