Opec junks quotas, flooding oil market

Member countries reject any controls on oil output, sending crude prices further down

VIENNA • Opec abandoned all pretence this week of acting as a cartel. It is now every member for itself.

At a chaotic meeting on Friday in Vienna that was expected to last four hours but expanded to nearly seven, the Organisation of Petroleum Exporting Countries tossed aside the idea of limiting production to control prices.

Instead, it went all in for the one-year-old Saudi Arabia-led policy of pumping, pumping, pumping until rivals - external, such as Russia and United States shale drillers, as well as internal - are squeezed out of market share.

"Lots of people said that Opec was dead; Opec itself just confirmed it," Mr Jamie Webster, a Washington-based oil analyst for IHS, said in Vienna.

NO POINT

Americans don't have any ceiling. Russians don't have any ceiling. Why should Opec have a ceiling?

IRAQI OIL MINISTER ADEL ABDUL MAHDI, on not seeing a reason for setting oil production targets for Opec members

Opec has set a production target almost without interruption since 1982, though member countries often ignored it and pumped well above it. The ceiling of 30 million barrels a day, in place since 2011 and now abandoned as too rigid, is no exception.

Opec output has outstripped it for 18 consecutive months, according to data compiled by Bloomberg. The organisation says it will keep pumping as much as it does now - about 31.5 million barrels a day - effectively endorsing limitless output.

The oversupply has sent the price of Brent, a global oil benchmark, to a six-year low, triggering the worst slump in the energy sector since the 2008 world financial crisis. It has cut the profits of major oil companies such as Exxon Mobil and BP in half, while crude-rich countries such as Mexico and Russia have watched their currencies plunge and their coffers shrink.

On Friday, there was no talk of even setting a production target that member countries could then disregard.

"Effectively, it's ceilingless," said Iranian Oil Minister Bijan Namdar Zanganeh. "Everyone does whatever they want."

Dr Emmanuel Ibe Kachikwu, the Nigerian Minister, reinforced the message, saying the market should not worry about the "semantics" of targets or real production.

"We aren't going to go back to a cartel and work against the customers - that time has passed," said United Arab Emirates Minister Suhail Al Mazrouei. Most of the market "doesn't have any ceiling", Iraqi Oil Minister Adel Abdul Mahdi told reporters. "Americans don't have any ceiling. Russians don't have any ceiling. Why should Opec have a ceiling?"

The prospect of Opec, which accounts for roughly 40 per cent of the world's oil production, flooding the market sent crude prices further downward. The US benchmark dropped 5.7 per cent to around US$40 a barrel in New York. On June 30, 2014, the price was US$105.37 a barrel. The oversupply is likely to continue in the new year.

Iran, for years under sanctions related to its nuclear programme, has promised to lift its production to as much as four million barrels a day by the end of next year, up from about 3.3 million barrels a day now.

Opec's policy is squeezing income for its members, whose combined annual revenue could fall to US$550 billion (S$769 billion) from an average of more than US$1 trillion in the past five years, the International Energy Agency (IEA) said.

Record output this year from Saudi Arabia, Russia and Iraq has boosted global oil stockpiles to an all-time high, the IEA said last month. The market is oversupplied by as much as two million barrels a day, Mr Zanganeh said.

BLOOMBERG

A version of this article appeared in the print edition of The Sunday Times on December 06, 2015, with the headline 'Opec junks quotas, flooding oil market'. Print Edition | Subscribe