VIENNA: The Organization of the Petroleum Exporting Countries agreed to keep the oil pumping, with no change in its production quotas, at the group’s meeting here Friday.
OPEC decided not to curb production even though oil prices are about 40 percent lower than a year ago.
The meeting was the first since Saudi Arabia urged the 12-country group late last year to give up a decades-long policy of trying to manage prices through adjusting supplies of oil. For the Saudis, there are signs that the strategy of focusing on market share, regardless of the impact on prices, may be working.
While still low compared with recent years, prices have risen nearly $20 a barrel from their January low of $45 a barrel. On Friday, immediately after the OPEC decision to keep its production target at 30 million barrels a day, the price of Brent crude, the international benchmark, rose slightly to $62.50 a barrel.
The Saudis have also been able to increase production 700,000 barrels a day in recent months, and their Persian Gulf allies, Kuwait and the United Arab Emirates, have also increased output. In addition, low prices have prompted oil companies to postpone tens of billions of dollars’ worth of projects, production growth in the United States is flattening, and demand for oil, perhaps stimulated by lower prices, is strong, the Saudis say.
“Don’t look at prices,” Ali al-Naimi, the Saudi oil minister, said in a brief conversation with reporters Thursday.
“Look at the balance,” he said of the market. “Look at what is happening to supplies. They are declining.”
OPEC delegates and analysts say the Saudis also see little point in trying to intervene in a market that is trying to find a balance after the influx of large quantities of oil extracted from shale rock in the United States. At least for now, OPEC’s main relevance is as a group of countries that produce about 30 percent of the world’s oil and that control an even greater portion of reserves, rather than as an arbiter of prices, oil executives say.
Analysts say the shale boom is likely to be one of a series of market-changing events in the history of the oil industry, much like the surge in new supplies from Alaska and the North Sea in Europe in the 1980s or the discovery of oil in East Texas in the 1930s.
“The oil industry and market are trying to find a new equilibrium after the disruption caused by the arrival of new supplies from shale oil in the United States,” said Bhushan Bahree, an oil analyst at the market research firm IHS who is observing the OPEC meeting.
This could lead to a prolonged period of prices below $100 a barrel, which is good news for consumers and bad news for strapped OPEC countries, particularly Venezuela. “Seventy (dollars) is the new $100,” said Roger Diwan, another IHS analyst – although prices are struggling to reach even $70 a barrel.
This emerging order is unfamiliar and could produce volatile prices. And it will put pressure on oil producing countries, perhaps even those in OPEC, to offer better terms. Already, notes Ryan Lance, chairman and chief executive of the US oil major ConocoPhillips, Britain has slashed taxes in an effort to preserve the viability of production in the North Sea, a move expected to be followed elsewhere.
Certainly, US shale production is likely to have a cooling effect on prices for some time. While lower prices have led to a drop in shale oil drilling in the United States, the US industry is adjusting and is poised to bounce back, industry executives said.
“If prices stabilize and start to recover a bit, you will see the rigs come back to work,” Lance said in an interview at the Hofburg Palace in Vienna, where he spoke at a seminar hosted by OPEC.
“Unconventional production is here to stay,” Lance told the audience of senior OPEC and industry officials, including al-Naimi, referring to shale oil activities.
Lance, whose company has a large position in shale, said the US industry was cutting costs and restoring profit margins to what they had been when prices were at $100 per barrel. A well that cost $10 million two years ago costs $7 million today, he said.
Those changed economics mean that the US industry can now produce the same amount of oil with a much smaller investment, Diwan said. This could lead US production growth, which has flattened recently, to resume its climb as early as the end of this year, he said.
US shale oil is far from being the only factor that could damper prices. If an agreement is reached with Iran on its nuclear program, international sanctions on that country could come to an end, and Tehran could soon be producing and exporting a great deal more oil.
After an initial verification period, Iran could probably put 500,000 to 700,000 barrels of oil a day onto the market “in fairly short order,” said David Fyfe, head of research at the Gunvor Group, a commodities trading company based in Geneva. “As we all know, half a million barrels per day is all it takes to turn the market. So it will be interesting to see whether Saudi Arabia eventually adjusts its output in light of new supplies.”
Iranian delegates say that once sanctions end, they expect to more than double exports to about 2.3 million barrels a day in a matter of months.
The Saudis are also warily watching increased production from Iraq, which has passed Iran to become the second-largest producer in OPEC.
As they weigh these uncertainties abroad, al-Naimi and his colleagues also face major unknowns at home. King Salman, who succeeded his brother King Abdullah in January, has proved far more dynamic in the role than analysts had expected, and he has been paying close attention to the oil industry. The king placed his 29-year-old son, Deputy Crown PrinceMohammed bin Salman, who also serves as defense minister, in charge of the energy industry, and has signaled that a shake-up in the industry is likely.
The details are unclear, but the intention appears to be to empower younger officials and modernize.
Al-Naimi, who turns 80 this year, has lost the chairmanship of Saudi Aramco, the national oil company, and it is unclear how long he will remain oil minister or who might succeed him. Another son of the king’s, Prince Abdel Aziz bin Salman, a long-serving oil official, has become deputy minister and is seen as increasingly influential.
Al-Naimi has simultaneously run the country’s oil business and largely set production policy, roles that could be shared in the future by two or more officials. But those in charge are unlikely to abandon Saudi Arabia’s recent policy of supplying its clients with the oil they need regardless of OPEC quotas, analysts say, and of producing enough of the fuel to feed Saudi Arabia’s growing network of refineries and petrochemical plants.
Those goals imply a high level of production, and meeting them means that Saudi Arabia and its Persian Gulf allies now have the smallest amount of spare capacity, or extra oil that they could produce in emergencies, in about a decade. Having such a thin buffer leaves the market vulnerable to price spikes in the case of major production outages, although having full inventories helps offset that risk.
The industry has entered a new and untested world, although it is one that oil executives say they are prepared to manage.
“If you can’t live with uncertainty in this business, you need to go out and find another profession,” Rex W. Tillerson, Exxon Mobil’s chairman and chief executive, told the OPEC seminar Wednesday.
