With the emergence of Shale oil in the market and other previously intermittent suppliers such as Iraq and Libya, the oil market witnessed a glut in supply. This did not deter oil producers such as Saudi Arabia, Russia and the others from cutting production. Excess supply and low demand resulted in driving down oil prices. With western sanctions being lifted off Iran, this country too entered into the international oil market and started producing oil in order to gain its market share and make up for the losses it had incurred previously.
Currently priced at $ 40 per barrel, oil price has witnessed a 50% surge from where it was in November 2015. Major oil producers are now looking for some relief in terms of oil prices, but it seems as if they would have to wait longer to witness oil cross the $ 45- $ 50 per barrel mark. In February 2016, oil producers – Saudi Arabia, Russia, Qatar and Venezuela agreed to place a cap on production and freeze output at January 2016 levels if other oil producers were to follow suit.
Following which, sixteen OPEC and non-OPEC producers, accounting for nearly half the world’s oil output, met in Doha to try to foster a deal wherein all would agree to freeze oil production. This meeting was the first ever step taken by oil producers to address the need to freeze output to allow the market to stabilize. The meeting however resulted in failure due to the inability of the participants to reach a consensus. One major trigger being the absence of Iran from these talks. Saudi Arabia has been prudent that it would only cut production if this move were met with a similar response from Iran. Geopolitical tensions between the two countries have strongly impacted this agreement; Saudi is in no mood to cut its output and let its rival Iran capture market share.
Although, Iran pulled out of these talks and made its stance clear; with sanctions being lifted off, Iran is reluctant to freeze production output at a time when its precedence is on regaining its lost market share. It has increased output by 500,000 barrels per day and is considering adding another 500,000.
Following the failure of the meeting, all eyes are now set on the OPEC Summit in June 2016 to reach a conclusion on the production cap.
But will this delay further hurt the oil producers and the economy?
Perhaps not. The optimism generated by the February meet witnessed oil prices rise gradually. It is quite possible that the inability of the leaders to strike a deal will allow Oil demand some more time to recover before the June summit. It is only rational to allow oil prices to recover on their own, without any pressure to reach market equilibrium. This will prove to be beneficial in the long run for all oil producers.
Although, in the short run, with OPEC producers such as Saudi Arabia, Qatar, Kuwait and UAE already facing budget deficits due to the falling oil prices, its highly likely that the failure of this meeting could greatly impact these countries spending and development. OPEC countries are considering re-evaluating their government strategies and preparing for a post oil era that will be marked with lower budget allocations and a focus on diversifying incomes and the economies. Most OPEC producers can still profit with oil being below $45 per barrel, but this price will only be sufficient to meet the daily costs of production, and is not adequate to sustain the economy and the society.
However, the question now arises is that if oil prices will stabilize in 2016 and reach the $ 50 per barrel mark? It is unlikely that this would occur in the upcoming months, but it is quite possible that oil prices could witness another plunge if Iran continues to add to the slump in the market. Recent developments in the OPEC countries following the Doha meet also need to be taken into account. Kuwait is currently witnessing a labor strike, which has resulted in slashing output by 1.7 million barrels a day. If this continues long enough, the loss in Kuwaiti supply could soon equate to the global surplus that was recorded in the second half of 2015. What could not be achieved though the Doha talks could be achieved unintentionally through these strikes.
It is worth speculating if the OPEC meeting in June would bring about some relief to the oil prices. The conclusion one derives from the Doha meet is that Iran is a major player in this deal and that even if the OPEC producers were to collectively reach a consensus on placing a cap on oil production, they would not be able to go ahead without Iran on board. It seems that until the June 2016, the oil producers will have to allow demand to recover on its own, while working with one another and Tehran to get on board the agreement.
*The views expressed in this article are of the author and do not represent those of The Political Analysis.