Oil Declines After OPEC Decides to Maintain Current Production

How Much Control Does OPEC Really Have Over Oil Market?
  • Group's statement makes no mention of new production target
  • OPEC may meet before June if prices continue to fall: Nigeria

Oil dropped after OPEC signaled it would maintain current production levels that are near records.

The Organization of Petroleum Exporting Countries is committed to production of about 31.5 million barrels a day, Nigeria’s Minister of State for Petroleum Resources and OPEC President Emmanuel Ibe Kachikwu said in Vienna after the group’s meeting. Ministers may gather again before June if prices keep falling, he said. The group pumped about 31.4 million in October, according to estimates in its monthly market report.

Oil has slumped since Saudi Arabia led OPEC’s decision last year to maintain production and defend market share against higher-cost rivals. The desert kingdom, the group’s biggest producer and architect of the current policy, has steadfastly opposed a cut in output unless countries outside the group cooperate. OPEC has pumped more than its collective target of 30 million barrels a day for the past 18 months, data compiled by Bloomberg show.

"The Saudis are sticking to their policy," Mike Wittner, head of oil-market research in New York at Societe Generale AG, said by phone. "The Saudis aren’t going to make any cuts unless they get cooperation both within and outside of OPEC. They want to see their major competitors, Russia and Iraq, shut in production."

Saudi Policy

West Texas Intermediate crude for January delivery dropped $1.11, or 2.7 percent, to close at $39.97 a barrel on the New York Mercantile Exchange. It’s declined 4.2 percent this week. The volume of all futures traded was 22 percent above the 100-day average.

Brent for January settlement slipped 84 cents, or 1.9 percent, to end the session at $43 a barrel on the London-based ICE Futures Europe exchange. It decreased 4.1 percent this week. The European benchmark crude closed at a $3.03 premium to WTI.

Falling crude prices helped spur a rout in oil-industry stocks, which were the worst performers on the Standard & Poor’s 500 Index this year. Its Energy Sector Index was down 0.5 percent at 3:20 p.m., while the S&P 500 is up 2.1 percent.

"We’re in for another leg down," said Bill O’Grady, chief market strategist at Confluence Investment Management in St. Louis, which oversees $3.4 billion. "The Saudis didn’t blink. They want to see non-OPEC countries cut supply before they take action."

Record Stockpiles

Global oil stockpiles have risen to record levels as Saudi Arabia, Russia and Iraq boosted supply, the International Energy Agency said on Nov. 13. There is global oversupply of 1.5 million to 2 million barrels a day, Iran’s Oil Minister Bijan Namdar Zanganeh said on Friday, before the ministers met.

Iran, which pumped 2.8 million barrels a day last month, according to a Bloomberg Survey, plans to boost supply by 500,000 barrels a day within weeks of sanctions being lifted and by 1 million barrels months later.

“This decision reflects the consensus going into the meeting of OPEC’s policy for prices needing to find a floor to deter new non-OPEC supply projects,” Gareth Lewis-Davies, London-based energy strategist at BNP Paribas SA, said by phone. “The higher quota reflects the realpolitik of accommodating Iran.”

Adding to the glut is Russia pumping at near record levels and increasing North Sea shipments, while crude stockpiles in the U.S., the world’s largest consumer, have expanded to more than 120 million barrels above the five-year seasonal average. Russia, Mexico and other big producers outside of the group have given no indication they would agree to any OPEC-led supply cuts. 

Not Budging

"This is a sign to other producers that they aren’t going to budge on production, market share or anything else," Phil Flynn, a senior market analyst at Price Futures Group in Chicago, said by phone.

America’s oil drillers have idled more than half the country’s rigs in the past year as the world’s largest crude suppliers battle for market share. The number of active oil rigs in the U.S. fell to 545, the least in five years, Baker Hughes Inc. said on its website Friday.

"The only bright spot is the U.S., where it looks like production will drop," Michael Corcelli, chief investment officer of hedge fund Alexander Alternative Capital LLC in Miami, said by phone. "The global picture is bleak. Everyone is pumping what they need to meet their budgets."

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