Oil prices per barrel went down on Monday, the 7th of December, at its lowest level since almost seven years, as a result of the Organization of Petroleum Exporting Countries ( OPEC) inertia regarding the plethoric offer at global level.
The light sweet crude (WTI )barrel’s price for delivery in January will so lost on a single day 2,32 dollars of its value, being exchanged from now on at 37,65 dollars on New York Mercantile Exchange ( Nymex). This corresponds at the lowest closing level of this commodity since February, 2009.
It is true that until now markets counted on the members of OPEC’s cartel to try to slow down the profusion of the offer or at least to reach a minimun agree between them , even if the hope of a possible reduction of OPEC’s production quotas diminishes from day to day.
However, OPEC has decided to maintain its offer at unchanged levels, without setting even a calculated target. The fact that certain countries derogate for ages the limitations which are aligned to them is not maybe totally stange to the current image of oil affairs around. Certainly, it is secret for nobody that the ceiling of global production of the cartel is a theoretical one as cartels are not allowed. According to various studies the real production of OPEC’s countries is indeed situated at present near 32 million barrels a day (bpd ),and anyway the group’s ceiling of 30 million bpd has largely been symbolic and, in practical terms, ignored.
Venezuela in head and most of OPEC’s members of the cartel, seemed at first sight ready to decrease the global level of their production to send a bullish sign to the market, but when it comes to make clearly an individual decision, it is no more the same affair.
The Iranian return to the market affairs, possible impact on Saudi Arabia and Russia exports?
Within one year, OPEC has already lost 450 billion dollars of income even though has never produced before so much oil in order to try to suffocate rival productions, in particular that of the United States, however, the measures pursued up until now of have not worked so well…
From now on, the market also has to count on Iran’s return, which considers good to take advantage the current fallout effect of the global oil basket when the levying of the western sanctions takes place.
Former customers in southern Europe already have shown an interest in resuming purchases of Iranian oil. Hellenic Petroleum SA is “in the process of initiating a dialogue” with Iran’s national oil company, as are “most western companies,” Vasilis Tsaitas, a company spokesman, said by e-mail. Hellenic operates three of the five refineries in Greece with total capacity of 341,000 barrels a day, according to its website.
“Iranian crudes will definitively be again another alternative to consider” if sanctions are lifted, Ignacio Rodriguez-Solano, a spokesman for Cia Espanola de Petroleos SAU, said by e-mail. The company runs three Spanish refineries with a total capacity of around 520,000 barrels a day.
Shipments from Iran used to account for as much as 30 percent of Hellenic’s crude needs and as much as 15 percent at CEPSA and were partly replaced by Russian exports after sanctions were imposed, according to the companies.
Saudi Arabia has started shipping crude to traditional Russian markets like Poland and Sweden, but supplies to Europe from the world’s largest exporter won’t increase by enough to reduce prices, said Texas-based consultant Stratfor. In contrast, a surge in Iranian exports after the lifting of sanctions could erode the value of Russian shipments to the region as soon as next year, according to KBC Advanced Technologies.
Only Saudi Arabia could restrict its production in order to counterbalance the Iranian arrival. Saudi Arabia’s oil strategy since last year was to flood the market, to defend its market share while facing the shale oil increased production from the U.S. according to EIA.
Riyadh would be ready from now on to accept an OPEC’s reduction of 1 million barrels. Provided, however that the other OPEC’s members show a bigger discipline and that the not member petroleum exporting countries of the cartel, such as Russia, make a gesture as well.
Yet, rather than closing ranks,OPEC is finding that an intensifying battle for market share, worsened by deep regional differences between Saudi Arabia and Iran, is driving it further apart.
Halfway through last week’s ‘s six-hour meeting, an unexpected dispute erupted over the defining feature of the cartel. In a move sources say was masterminded by Saudi Arabia, ministers finally agreed for the first time in decades to drop any reference to the 13-member group’s output ceiling.This appeared to be a direct response to Saudi Arabia’s arch-rival Iran and its return to the oil markets.
Searching into Geopolitical and Religious causes
Nonetheless, the present Sunni-Shia conflicts setting Saudi Arabia and Iran at each other’s throats, particularly in Syria and Yemen, make the relationship between the two OPEC powers even more fraught.
“The fact that Iranian-backed Houthi militants are squaring off against Saudi-led troops in Yemen is not helpful, as increased Iranian oil revenues are likely to find their way to Iranian military interests in Yemen, Iraq, and Syria,” Aberdeen Asset Management’s investment strategist Robert Minter said.
Hence OPEC is setting up for a showdown at the corral, he added, as Iran wants its pre-sanction market share back, and the Gulf states are not inclined to cede volume when they are already feeling the budgetary pain of reduced prices.
Reuters: Crude prices edged away from nearly 7-year lows on Tuesday, 8th of December, as China reported strong commodity imports despite economic weakness, but overall the market remained under pressure due to global oversupply compounded by OPEC’s decision to keep output high.
Benchmark Brent and WTI futures both fell over 6 percent the previous session to reach 2015 lows, and they are closing in on levels last seen during the credit crunch of 2008/2009. Should they break through 2008/2009 lows, the next downward target would be levels not seen since the early 2000s.
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Sources: Business Insider, Bloomberg, Reuters, FT.COM, Nasdaq, image : public domain