How oil prices will behave post OPEC meet

The oil market is jittery as it awaits the outcome of a meeting in Vienna of the members of the Organisation of Petroleum Producing Countries (OPEC), which is likely to decide on the production policy. Oil has hit the longest losing streak, falling for five straight days in the past 16 weeks.

However, oil has jumped nearly 85% from the bottom it touched earlier this year. The significant price jump would have made most producers happy, but it is not the case with the OPEC and other oil producers who have of course seen better days at $100 a barrel.

 

On the other hand, the fall in oil prices has made oil-producing countries take the path of fiscal prudence, which they had not done in the past many years. For oil producers, lower oil prices meant introducing taxes on its population, which led to an unrest because they are not used to such high taxes.

The negative impact of low oil prices is clearly visible in Venezuela where the inflation is at 720% and its currency, bolivars, has lost all credibility. Since the country imports most of its goods, there is a payment crisis and a crisis of availability of goods in the country.

Images from Venezuela are on the minds of OPEC members who fear a similar unheaval in their countries if oil prices drop further. While the logic of keeping prices high is clear, the problem is that one of the OPEC’s members, Iran, has gone through a period of sanction where it was forced to produce less oil so that the money could not be diverted for military purpose.

Iran, the second-largest oil producer, was made to follow sanctions imposed by countries led by the US and had been producing oil just enough to meet its basic requirements. Iran now wants to be compensated and regain its market share.

As the countries head for the meeting, Iran has already said it is not keen on cutting production. Iranian Oil Minister Bijan Zanganeh said “an output ceiling has no benefit to us", but feels that a country-wise quota should be re-imposed.

Not many analysts expect that a production cut will be announced in the meeting. Yet experts feel that the fast-changing dynamics in the oil market might compel them to come out with a joint statement which hints at solidarity among the members and buys them time till the next meeting.

OPEC members know they have a small window to agree on production cuts. The recent rise in oil prices has been largely on account of supply disruptions. More than three million barrels per day of oil was out of the market on account of fire in Canada, terrorist attacks in Nigeria, problems in Libya and Venezuela.

Venezuelan energy minister Eulogio Del Pino warned that supply outages have propped up prices in recent months but a global oil glut might build up again when missing barrels return. "More than 3 million barrels are out of the market. When those circumstances are removed from the market, what's going to happen?"

Even during the period when oil prices have moved by 85%, OPEC nations barring Nigeria and Venezuela have increased their production by almost 100,000 barrels a day.

Canada has also started work on restarting its oil rigs and analysts expect Nigeria to reach its earlier production levels in some months. In such a case, there will be limited upside for oil prices even if on a best case scenario the OPEC nations agree to a cut.

But in case if they do not cut production, which is what the general perception is, then the downside is partly in the price.

Commodity analyst Chris Main of Citi in an interview with CNBC says that oil prices will not see much volatility and see oil price in the range of $45-55 a barrel in the months ahead. Only a big surprise can rattle the market either ways, but there are few takers for such an eventuality.