Money Losing OPEC Members Expected To Follow Saudi's Lead on Market Share First Strategy at Vienna Summit This Week

by Ship & Bunker News Team
Tuesday May 31, 2016

With the Vienna meeting of the Organization of the Petroleum Exporting Countries (OPEC) now just a few days away, it's becoming more certain that members at the summit will merely go along with Saudi Arabia's market share first strategy - even though they're losing money because of it.

Bloomberg notes that all but one of 27 analysts it surveyed said OPEC will stick with the strategy: "That means the meeting may be less fraught than the previous summit in December, which ended with public criticism of the Saudi position from Venezuela and Iran."

A roundup of comments from OPEC member representatives further suggest the predictable course of events on June 2, cases in point: Anas Al-Saleh, acting oil minister for Kuwait, who recently remarked that OPEC's policy "has been working well"; Sudirman Said, energy and mineral resources minister for Indonesia, who stated his country will stick to its plan to increase oil output this year; and the head of Iran's state oil company, who recently said his country has no plans to join any output freeze as it remains focused on restoring exports.

Such comments, in the face of the global oil glut and market chaos that has dominated headlines for the past year, have caused an increasing number of critics to lament OPEC's unwillingness or inability to persuade its members to set output limits - and dismiss the cartel as irrelevant.

Exacerbating the situation is the fact that with oil prices at $50 per barrel, many members are losing money pursuing the market share strategy: for example, according to analyst calculations Algeria needs a price of $87.60 to balance its budget; Iran needs $61.50; Iraq needs $59.70; Libya, Nigeria, and Venezuela need prices above the $100 mark; and even the Saudis need $66.70 for their strategy to balance the books.

But Bart Melek, head of commodity strategy at TD Securities, argues that "The fact that they've made statements - that they're pursuing market share and these types of polices - have made them incredibly important: they've moved the market.

"It's just that we didn't see the prices go up, we saw them go down; it doesn't diminish their power."

Ed Morse, global head of commodities research at Citi Research, goes a step further and credits Saudi Arabia for possessing keen business sense: "Saudi Arabia doesn't want to become a failed petrostate; that's the stated objective, to find a way for the economy to prosper, even in a low-price environment.

"(If) you can see the end of the life of petroleum in the world economy, then maximizing production makes sense because the more you hold oil in the ground, the less value it will have over time."

Typical of the derisive remarks from critics about OPECĀ is the comment made last week by a senior non-Gulf member of the cartel, who complained that "Saudi Arabia killed OPEC and buried it."