The oil market cheers every hint that members of the Organization of Petroleum Exporting Countries will agree at a meeting Nov. 30 in Vienna to cut production. The exporters' group raised expectations on Sept. 28 when, at an extraordinary meeting in Algiers, it said it would try to cap group output at 32.5-33 million b/d. That would represent a cut of as much as 740,000 b/d and be OPEC's first effort to limit supply since 2008.
Meanwhile, developments affecting the mere chance of an agreement move the market. Crude prices slumped early in the week of Oct. 31, for example, on news of discord within OPEC and reluctance by several non-OPEC producers-crucially including Russia-to cooperate unless the exporters' group reaches an agreement first.
Many hindrances
In this new attempt to coordinate supply, OPEC faces a list of hindrances and only one sure assist. Among the hindrances:
• Agreement will be elusive. This has always been the case and is more so now than ever. Individual OPEC members tend to support production cuts if others make them. Important members with output suppressed by events will want exemptions from country quotas. They include Iran, Nigeria, and Libya. Iraq, torn by war, financially strained, and producing oil at record rates, has been excluded from OPEC production management for years and won't relish imposed sacrifice. Saudi Arabia and Iran are openly antagonistic.
• Enforcement is nonexistent. If oil prices rise for any reason, producers voluntarily restraining output will be tempted to cheat. Most will. Others will be powerless to do anything about it.
• Unproductive potential is quite high among OPEC members. Sabotage, war, and economic collapse keep output well below potential in Nigeria, Libya, and Venezuela. When those pressures ease, the countries will want to regain lost ground, as Iraq and Iran are doing now. At some point, OPEC will have to accommodate production increases if it's to continue managing supply.
• OPEC must contend with production promptly available from shale plays. Shale operators can raise supply in response to a price increase as quickly as they can drill and fracture wells. The exporters' group hasn't before faced immediate competition at this scale.
• Another dimension of competition is developing at the light end of the product barrel. Growing natural gas production creates a surge in NGLs from gas plants. By early next decade, the incremental output might amount to nearly the combined crude production of Kuwait and the United Arab Emirates-both now at record-high rates.
OPEC, like all would-be cartels, found supply management challenging when production everywhere else was at capacity levels. That condition no longer applies. Abundance now controls the market. More supply is in prospect.
OPEC's one assist comes from depletion. At some point, the aggregate decline rate of all the world's oil and gas fields will exceed the rate at which all producers can add supply. That this will happen is certain. When it will happen is not.
On balance, OPEC faces more challenges reaching, enforcing, and sustaining a production agreement now than at any time in its history. So why does it even make the effort?
Possible reasons
One possible explanation is that merely talking about production restraint buoys crude prices and production revenue temporarily. OPEC's leading members also might hope to achieve enough of an agreement, even if it's ragged and short-lived, to start the inventory drawdown that must occur if crude prices are to strengthen durably. And some of this press-release market manipulation might be targeted to domestic audiences in important producing countries like Saudi Arabia, the UAE, and Kuwait, where governments are restructuring economies larded with consumption subsidies and might want to be seen taking action to bolster the price of crude.
Much about oil prices in the next few weeks depends on expectations about diplomacy in Vienna on Nov. 30. More genuinely important to oil prices, however, are market conditions on Dec. 1 and beyond.
