OPEC: Cheap oil will keep flowing, for now

An OPEC deal to cut or cap oil output looks unlikely for the immediate future, as Saudi Arabia and Iran say their focus is on hearing different views.

Energy ministers from OPEC and other oil-producing countries are meeting in Algiers this week to discuss whether production should be capped to boost the oil price. Some observers hoped that the International Energy Forum would produce a deal that could provide certainty about the future of the commodity.

Any kind of deal would require the cooperation of Saudi Arabia, the world’s largest oil exporter, and Iran, which has been ramping up production in an effort to regain its pre-sanctions market share. The two countries may not be looking for an agreement at this point, but some signs suggest the oil glut could stabilize soon.

“We are feeling good about the market, and I think the rebalancing is here but taking [longer] than what we had hoped,” Saudi Energy Minister Khalid al-Falih told reporters in Algiers. “Rebalancing” refers to a new equilibrium between oil production and consumption that will produce higher oil prices.

High production levels, which began in mid-2014 as part of an OPEC strategy to increase market share, have led to record output levels and forced down the value of a barrel of oil. Producers in states where the cost of oil production is high have come under increasing pressure. 

A Deloitte report released in February said that one-third of US oil companies were at high risk of going bankrupt in 2016 because of collapsing prices. But 86 percent of industry professionals think US oil and gas are rebounding or will do so in the next two years, according to a Deloitte survey.

Some signs point to a future deal. Notably, Saudi Arabia agreed to reduce production to January levels, according to Algeria’s Energy Minister, despite previously refusing to cut output to prevent Iran from regaining market share. The cut would remove about half of Saudi Arabia’s 1 million barrels per day increase since 2014. 

This reduction is contingent on a production freeze by Iran, however, that would cap Iran’s production at around 3.6 million barrels per day – half a million barrels fewer, or 15 percent less, than Iran says would get it back to its pre-sanctions share of global oil production. 

For its part, Iran has said that an agreement may be forthcoming. Iranian oil minister Bijan Zanganeh told reporters, “It is not the time for decision-making,” but he added, “We will try to reach agreement for November.” The next formal OPEC meeting will take place in Vienna on November 30. The National Iranian Oil Company expects the country to hit pre-sanctions levels of production in late 2016 or early 2017.

The international picture remains complicated, as states like Iraq and Libya seek to increase output and gain the revenue they need. Other states, such as Venezuela and Angola, are desperate for a reduction in output to shore up prices. Russia, which recently touched an all-time high in output (11.75 million barrels per day) would support a production freeze, the country’s oil minister said on Tuesday.