Over the weekend OPEC members decided not to cut oil production levels. Instead, they chose to focus on doing what cartels are supposed to do: join together to regulate output.
OPEC announced yesterday that member states would restrict oil production to their allotted amounts “to contribute to market stability” as members have yet to completely comply with its total stated output cuts of 4.2 million barrels a day since last September.
There are a number of reasons it decided to maintain quota levels, despite calls by several nations before the talks to cut output. OPEC:
• wanted to ensure G-20 leaders, who meet early next month, would not lambaste the organization (and in person for the Saudis which are G-20 members) for adding to economic malaise by raising the price of oil.
• thought that an output cut could raise prices blunting demand and ultimately undermining efforts to increase revenue.
• felt that previous efforts had begun to succeed in stabilizing markets and that pricing was such that demand may be rising. (Click here for an excellent explanation on the forward curve and pricing.)
• needed to compromise internally. Nations with budgets that are heavily reliant on oil proceeds were pushing for a reduction. Adhering to quotas should reduce output by 800,000 bpd if countries actually didn’t cheat. (Good luck getting Iran, Venezuela and Angola to rein in production).
Another note of interest. Russia’s hard-line Deputy Prime Minister Igor Sechin attended as an observer and stated that his country supports OPEC’s decisions. He added that his country had reduced production by 1.9% over the year ending in January, as if the country’s policies of intimidating foreign investors, heavily taxing the oil industry and investing in the nationalization of resources rather than in production were all in support of cutting output.
Sechin also announced that the country was delaying issuing licenses for fields in the arctic, which will do little to affect current prices. In addition he stated, Russia would withhold oil from the world market and distribute it to farmers, as if he sought international credit for populist and essentially domestic policies. But Sechin didn’t receive all the accolades he sought. According to the WSJ Environmental Blog, some OPEC officials countered that Sechin’s claims of supporting OPEC are dubious as independent data shows Russian production recently increased by up to 700,000 barrels a day.
