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John Hall: An Overview of the 166th OPEC Meeting

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On the face of it, output has not suffered and OPEC is still producing over 30mbpd. The only anomaly in this context is Venezuela. Some years ago, Venezuela demanded that the Secretary General should visit the country, for them to demonstrate to him an output level close to 3mbpd. Until the end of Q2 this year, Venezuela has been reporting 2.8mbpd, but nothing since then, which contrasts strongly against the figure of 2.3mbpd, supplied from secondary sources which have maintained this level until the end of October. My guess is that the lack of investment in PDVSA, the state owned oil company, has finally come through and as Venezuela needs a production cost of around $117pb, it is very vulnerable to the lower prices of today.

As prices fall benefits are quickly perceived and in Europe, where taxation on fuels is high, any opportunity for a reduction is seen as good news. Since the end of June, the Brent Crude price has fallen by $35 or 32% from $112 to $77 but as we do not run our vehicles on crude, we have to relate to prices paid for automotive fuels.

We also have to adjust these prices from dollar to sterling. There has been a fall in Diesel and Petrol prices by 17% and 25% respectively, but the commodity element is only one part of the equation and less than half of the overall price. In the UK Diesel and Petrol have a duty level of 58ppl added and then, VAT of 20% applied over the combined commodity plus tax price. So a price of 130ppl in June, for Diesel, should today be around 121ppl, 9ppl cheaper. Correspondingly, for Petrol, the same price of 130ppl in June should now stand at 118ppl, giving a reduction of 12ppl. There will not be any compensating duty increase in the UK before 31st. August 2015.

The year started well for the OPEC Basket and by the time of the last Meeting they were enjoying a price for Q3 of $100.86 but from that time it fell in line with the Brent price, achieving $96 in September, $85 in October and around $75 in November. It has remained there in recent days, not showing any real sign of enthusiasm for anything that OPEC might have done up until this Meeting. Looking at what each member supposedly needs, to balance their fiscal budgets, only Qatar and Kuwait can survive. There has been little long term planning and many OPEC members have spent indiscriminately and not invested in the infrastructure for the future. Whether the lower oil price will force some level of discipline into the administrations or not we shall probably never know. The opportunity is there because the market will turn and prices will rise more slowly, to allow for adjustments to be made by consuming nations, as they catch up and move themselves out of recession.

Today in Vienna, the proceedings were opened by the Head of the Libyan delegation. What is frustrating about Libya is that there is an official minister and an unofficial one, reflecting the physical division of the country but neither was present today. He made the point that since the last meeting, the global economic recovery has continued, although at lower levels, that he expects global economic growth in 2015 to rise from 3.2 per cent to 3.6 per cent. Similarly, world oil demand in 2015 is forecasted to grow by around 1.1 million barrels per day, with total world consumption at around 92.3 million barrels per day and the bulk of this net oil demand growth will continue to come from non-OECD countries.

Next year OPEC expects non-OPEC oil supply to rise by 1. 4 mbpd, giving an average of 57.3 mbpd, with the bulk of it coming from the Americas. In terms of price, he suggested that although the OPEC Reference Basket had been fairly stable during the last three and a half years, ranging from $105 and $110 per barrel, since mid-June it has lost 30% of its value. They do not feel that the recent fall is exclusively attributable to fundamentals but also to the impact of speculation, as we have already noted. Demand will pick up and support the market, with opportunities for alternative fuels and climate change directives. They are also aware that if the current trend continues, the longterm sustainability of capacity expansion plans and investment projects may be put at risk.

Looking ahead, Geo-political tension will need to be monitored and particularly threats from both Russia and IS. In the short term, there is definite uncertainty on oil prices and we can expect a further drop, but with winter coming on and lower prices filtering through to build up recovery, we may see the stabilisation that OPEC is hoping for. However, with the price rapidly falling now, already $5 within the hour of the meeting ending, how much further will it go and will OPEC feel the need to re-convene before June? I shall be there, whenever it is!

 


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