OPEC: A Meeting to Maintain the Status Quo?

The 172nd meeting of the Organization of the Petroleum Exporting Countries (OPEC) ministers, which will be held on Thursday, May 25, in Vienna, is almost certain to extend the previous agreement among its members to limit oil production, which had the support of many non-OPEC producers. This prediction is based on current oil market data and the outlook for the global economy. In this regard, the following questions can be raised: 1) Has the agreement among OPEC and non-OPEC countries to reduce production been respected? At the end of last November, OPEC decided to reduce its production by 1.2 million barrels per day. Several non-OPEC producers also decided to cut their production by 600,000 barrels per day to raise oil prices, with half of this reduction undertaken by the Russian Federation. Contrary to expectations, these agreements were largely respected, and oil prices increased by about 15 to 20 percent. Nevertheless, OPEC and non-OPEC producers were unable to end the surplus oil supply in the market, which continues to fluctuate around 300,000 barrels per day. Additionally, the volume of oil stocks in developed countries and emerging powers remains relatively high, which also hinders the recovery of the oil market. 2) Why is the global oil market still facing a surplus? One of the most significant factors affecting the current state of the global oil market is U.S. shale oil, which appears to be increasing production in 2017 much more than anticipated. This increase, based on various assessments, will be between 1 million and 1.4 million barrels per day, a figure that could largely neutralize the efforts of OPEC and non-OPEC countries to limit their production to reduce supply. Many oil companies have turned to shale production in the U.S., and according to some sources, investments in U.S. shale oil are expected to reach $100 billion this year. Outside the U.S., oil production is also increasing in some countries, including Brazil, and to some extent in the UK, Norway, and Canada. Finally, the situation of three OPEC member countries, which for various reasons are not subject to last November's agreement, must also be considered. These countries are Iran, Nigeria, and Libya. Iran, which had seen a reduction in production due to nuclear-related sanctions, was allowed to return to pre-sanction production levels. Nigeria, due to a significant drop in its oil production following turmoil in the Niger Delta, was exempted from the OPEC agreement. Lastly, Libya, whose oil production has severely fallen under internal turmoil, is not obliged to adhere to last November's agreement to limit production. A potential increase in production from these three countries could raise the level of surplus supply in the global oil market and prevent price increases for this commodity. 3) What decision will OPEC make at the May 25 meeting? The decision on May 25 by OPEC in Vienna is likely to be aimed at maintaining the status quo. Last week in Beijing, the Saudi oil minister and the Russian energy minister reached an agreement on this scenario. Given the decision of these two oil giants, it is expected that OPEC countries will continue to limit their oil production at the agreed level, and non-OPEC producers will also extend their commitments. It is predicted that the November OPEC agreement, which expires at the end of June, will be extended until the end of March next year. 4) How will oil prices evolve? On the eve of the May 25 OPEC meeting in Vienna, the price of North Sea Brent crude was fluctuating around $54 per barrel. Based on existing data in the global oil market and if the November agreement is extended by OPEC members and supported by non-OPEC producers, the price of oil per barrel is likely to remain at current levels this year and next year. However, a significant surge in U.S. shale oil production could lower prices by increasing supply. Conversely, if the global economy, as predicted by some international organizations, accelerates, there could be an increase in energy demand and consequently an increase in oil prices, potentially reaching $60 per barrel.