Five things to know about Friday’s OPEC meeting in Vienna

HOUSTON — Oil strategists from a handful of countries are gathering in Vienna this week to decide whether or not to create an artificial scarcity of crude to boost oil prices.

Outsiders don’t expect the Organization of Petroleum Exporting Countries to make big changes to its current strategy, but any hints that it is laying groundwork for new plans could move energy markets – dramatically. After an OPEC meeting this time last year, U.S. crude fell more than $7 a barrel when the cartel decided against squeezing supplies despite of a global oil glut, choosing to defend its corner of ever-evolving markets in East Asia and North America.

OPEC’s meeting officially begins on Friday. Here’s what has changed about the group and the world around it lately.

Market Influence

The 12 OPEC nations put out just 4.4 percent of the world’s gross domestic product last year and together make up a quarter of the planet’s land mass. But they control 73 percent of the world’s oil reserves and for years have worked together to sway oil markets by tweaking output levels, a strategy that gives them out-sized influence in a global economy that runs mostly on oil.

But the oil exporters chose not to tap into their market power last year, and if they do the same this year by keeping their oil flowing at the same rate, some believe it would just be confirmation the international cartel has become less relevant on the global energy stage. “It’s more and more looking like an organization that is very moot at this point,” said Jamie Webster, a senior director at IHS Energy.

Barclays analysts wrote Thursday there are too many bearish market forces at play for OPEC to be able to prop up prices with bullish intonations alone. The market, Barclays said, is still expecting Chinese economic growth to lag next year; Iranian production to increase; a drop in winter demand and, if the Federal Reserve starts hiking interest rates, the effect on the dollar could make it more expensive for international buyers to buy dollar-denominated crude, sending demand and prices down.


The implication is OPEC has ceded market-pricing influence to other market players including the financiers who back U.S. shale production, a flexible source of crude supplies that can shift output up and down relatively quickly depending on prices.

Because shale wells have rapid depletion rates, oil producers have to keep drilling at high rates to keep output growing. But it’s an expensive venture, so equity and debt capital markets are key to shale drilling and have become a more central player in determining oil supplies. Shale production kept increasing earlier in the year when capital markets were pouring cash into distressed oil companies, but the output has fallen as investors have reined in cash, realizing oil prices aren’t making a quick recovery.

Indonesia and Iran

Indonesia, which joined OPEC in 1962 and left the group in 2009, is returning into the fold at this year’s meeting, meaning the cartel could announce an increase in its overall crude production target of roughly 1 million barrels a day to accommodate the oil importer. But the change won’t actually affect behaviour at OPEC; that is, it likely won’t cause the group to pump more oil. The group’s production target has historically been a faint guideline, surpassed easily and often. The cartel is currently pumping around 2 million barrels over its target currently.

One nation OPEC isn’t likely to make accommodations for is Iran. Iranian officials have called for its fellow exporters to curb production in order to make room for the Islamic Republic’s return to the oil market next year, but Saudi Arabia and other key Gulf states are expected to ignore pleas for production cuts. The United States and other western powers are expected to lift oil sanctions against Iran in exchange for constraints on Iran’s nuclear program. Iran expects to boost its production by at least 500,000 barrels a day next year.

Proven Strategy, So Far

Crude production outside the organization is slated to fall in the current quarter for the first time in four years, with declines reaching 520,000 barrels a day early next year, according to the U.S. Energy Information Administration. OPEC’s top oil exporter Saudi Arabia, the world’s largest crude producer, has said it will not cut its production alone to buoy the market.

Saudi Arabia has the financial resources to ride out the oil slump for at least half a decade, according to the International Monetary Fund, and can afford to wait a while longer for the downturn to fix the market oversupply. But oil production around the world will have to fall a lot further before supply and demand are rebalanced..

“The strategic reasons of why (OPEC) made the policy stance they did last year are still there and still in place this year, even though the pain has been greater than any OPEC member expected over the course of the past year,” Webster said.

Outside Cooperation

Some traders are hoping Saudi Arabia has found another oil exporter willing to help curb production: Russia. The world’s two biggest oil producers have been building closer ties in the energy sector, with Saudi Arabia investing $10 billion in Russian infrastructure and energy projects. The two recently formed a working group to start talks on cooperation in oil and gas, and market observers are watching for any signals from the OPEC meeting that the two geopolitical rivals may pair up.

But there are plenty of reasons such an alliance is doubtful. Saudi Arabia and Russia are supporting different sides in the Syrian civil war. Russia backs the regime of Syrian President Bashar al-Assad, while Saudi Arabia supports the rebels trying to overthrow him. Also, Saudi Arabia and Russia have become fiercer rivals in the past year, with Russia sending more exports to China through a well-placed pipeline and Saudi Arabia encroaching on Russia’s turf in Poland and other European markets.