The world’s leading oil exporters could be finally about to take action following the fall in prices. Members of the exporters’ group Opec, together with some other oil producers, are meeting in Qatar on Sunday to discuss freezing output.
They want to push up the price of crude oil, which is less than half what it was in June 2014
In previous episodes of falling prices, Opec has been much quicker to respond, often cutting output.
The agenda for the meeting in Doha, the capital of Qatar, is a freeze in production. No cuts in other words, just a commitment to no more increases.
But even that possibility has given some support in recent weeks to the price of oil. The low it reached earlier this year was about $27 a barrel for Brent crude oil, one of the leading international market prices.
This week it has been very close to $45. That is to a large extent due to traders considering the possibility that some oil producers are close to taking some sort of action to push prices higher.
It’s worth emphasising that even at current levels the price of oil is far below where it was as recently as June 2014 – when it reached $115.
The fall has hurt many oil producing countries. Earlier this week, the International Monetary Fund said it had damaged financial stability and the government finances in many of them.
The meeting is not formally an Opec event, though all or very nearly all the group’s members will be represented. There will also be some non-members, notably Russia.
The decision to hold this meeting, with a rather unusual group of attendees, reflects the oil exporters’ persistent concerns about the level of prices and a feeling that any action needs to involve more than just the members of Opec.
Two of the world’s leading producers are not going to be there: the US and China. Both countries have large oil production industries, but they use nearly all of it themselves, and have to import extra to meet their own needs. Their economies overall tend to benefit from cheaper oil so they don’t have a shared interest with those who will be turning up in Doha.
Still, there is more than enough oil production that will be represented there to make a substantial difference to the global market if the participants chose to take strong action.
What many oil analysts say, however, is that they aren’t talking about action that is going to achieve much. In the past, Opec has often managed to agree and deliver cuts in production. This time all that’s on the table is a potential agreement to refrain from further increases.
Among the countries attending there is certainly a good deal of support for the idea. But one important player, an Opec member, is determined to increase its production: Iran.
As the country emerges from western sanctions, the Iranian government wants to regain the share of the market that it lost as a result of those restrictions on its international sales.
Iran is not even sending its oil minister Bijan Zanganeh to the meeting, although another senior official is expected to attend.
Saudi Arabia’s Deputy Crown Prince has said that a freeze could only happen if Iran takes part. But there are doubts about whether this really is the Kingdom’s last word.
No ‘game changer’
Saudi concerns are the key reason why countries outside Opec are involved. Whenever Opec has cut production in the past, Saudi Arabia has tended to make the biggest contribution. But this time, they were reluctant to take the loss of market share that would involve. But it’s less of a sacrifice if some other countries take part. The US never would, so Russia is the biggest producer that could be involved.
So if they can agree a freeze, would it make much difference? London consultancy Capital Economics said in a note to clients: “Freezing output at current high levels would simply maintain the excess supply that is now in place and as such would not be a game changer.”
Perhaps what would make more difference is the much anticipated decline in American shale oil production which appears to be finally gathering pace, according to the International Energy Agency, an official organisation which monitors the energy situation for its member countries.
In fact one reason for Saudi Arabia’s reluctance to take action sooner is widely thought to have been a desire to keep the pressure on its competitors in the US shale business.
It’s worth remembering that the rise of shale oil in the US has transformed the global market. The increased US supply is one of the key factors that have been bearing down on international oil prices, along with weakness of demand which in turn reflects China’s economic slowdown and the failure of the global economy to generate robust growth.
Having said all that, this meeting might turn out to have some symbolic significance. Opec has been very slow to respond to what is a serious problem for its members. Most recently when the group met in December last year, their final statement surprised many observers when it did not even mention a production ceiling, something they nearly always set out at their regular meetings. .
Analysts at Barclays Research said ahead of the Doha event: “Opec’s December meeting was a failure, but Doha gives the organisation the opportunity to reassert its relevance.”