OPEC’s meeting in Vienna is less than a month away, and oil producers – countries and companies alike – have been raising their concerns at an energy conference in the United Arab Emirates over the cartel’s strategy to keep prices low.
The issue arose on Monday when Mohammed bin Hamad al-Rumhy, the oil minister of Oman – not a member of OPEC – told the annual Abu Dhabi International Petroleum Exhibition and Conference that oil production is at “irresponsible” levels, leaving little latitude for variations in production.
“This is [a] man-made crisis in our industry we have created,” al-Rhumy said. “And I think all we’re doing is irresponsible.”
Al-Rhumy added, “This is a commodity that if you have 1 million barrels a day extra in the market, you just destroy the market. We are hurting, we are feeling the pain, and we’re taking it like a God-driven crisis. Sorry, I don’t buy this, I think we’ve created it ourselves.”
The next day, al-Rhumy’s concerns, if not his criticism, were shared by executives of leading international oil companies: ExxonMobil of the United States, BP of Britain and Total of France. All said they expect the current glut of oil, and the resultant depression in oil prices, to last longer than anyone expected – months longer, if not years longer.
“I’m not sure we will exit from low prices before many months,” Total CEO Patrick Pouyanne said.
Lamar McKay, the director of exploration and production for BP, said he expects oil prices will stay low for some time, and Michael Townshend, the company’s director for Middle East operations, said he expects the price of a barrel of oil will rise no higher than about $60 for three more years.
These gloomy forecasts contrasted with the OPEC view. The group’s secretary general, Abdullah al-Badri, told the conference on Tuesday that 2016 is likely to be a year for positive momentum in oil markets. And on Monday, UAE Oil Minister Suhail al-Mazrouei, said a decision by OPEC to cut production to shore up oil prices would only play into the hands of its competitors.
As a result, al-Mazrouei said, he doesn’t expect OPEC to change its strategy when it meets Dec. 4. “When you are the least expensive oil, you should be the base producer,” he said.
At its meeting in November 2014, OPEC adopted Saudi Oil Minister Ali al-Naimi’s strategy of keeping production at 30 million barrels a day, despite the fall in oil prices caused by a rapid increase in production by non-members, especially the United States, which had ramped up production of shale oil.
The goal was to wage a price war that would keep oil prices so low that such producers, who rely on relatively expensive hydraulic fracturing, or fracking, can’t afford to drill for oil. The break-even point for fracking is around $60 per barrel, and oil now averages about $50 per barrel, leading to a noticeable drop in U.S. drilling.
In the meantime, OPEC nations are exceeding their production limit of 30 million barrels per day by more than 1.5 million barrels, so it’s no wonder oil prices are so low.
Concerns about low oil prices were raised before last year’s OPEC meeting, particularly by Venezuela.
Saudi Arabia had already said it opposed production cuts. Venezuela’s president, Nicolas Maduro, said he was hoping to work out ways to bolster oil prices in meeting both with members of OPEC and producers who weren’t part of the 12-member cartel.
That came to naught, however, and the Saudi plan became OPEC policy. Despite current dissatisfaction from some oil producers, there’s no reason to expect the cartel to change course if it believes its strategy is working.