Oil Prices Find their Footing
Organization of the Petroleum Exporting Countries (OPEC) members: Saudi Arabia, Qatar and Venezuela have arranged to meet with non-OPEC member Russia in March, 2016.1 The meeting will take place after their initial talks on February 16, 2016, in the Qatari capital Doha, where they reached a tentative agreement to freeze crude output. Record-high production levels have forced oil producers to take proactive measures, as prices have dropped significantly. The members of the agreement are planning a review meeting in July of this year, to follow up on the results of the proposed output freeze. Although the exact levels have not been discussed, it is known that talks are ongoing with the intention to recruit other non-OPEC members, specifically Mexico and Norway.
Emerging market nations such as India and China have benefitted from low energy prices keeping high inflation pressures under control. Oil producers on the other hand have seen their deficits spiral out of control, as in some cases their economies have a high dependency on crude exporting revenues such as Venezuela. Venezuelan petroleum exports are 96 percent of its total exports.2
North American Rig Count Falling in Step with Energy Prices
Shale producers in the U.S. and Canada have begun to feel a tighter squeeze as seen by the drop off in oil prices and gas rigs. The week that ended on February 26, 2016, saw Canada lose 31 rigs. Year over year, rig count in Canada has fallen by 155.3 The same report shows a contraction of 765 in the U.S., leaving only 502 active rigs. The all-time low in the U.S., as measured by RigData is 467. There is no doubt that the low price of crude has reduced the profitability of energy companies who have pared down on production. Yet those rigs not in operation are the least efficient, and remaining rigs have kept U.S. production close to record-high levels.
OPEC Divided on Oil Production Goals
Iran is not part of the OPEC-Russia agreement, as it is unlikely to agree to limit its production levels after ending the sanctions that halved their crude exports. Iranian comments have kept the gains in the price of crude limited as the nation holds the fourth largest crude reserves4 and is expected to match its pre-sanction levels as soon as possible. A diplomatic disagreement with Saudi Arabia will make it difficult for Iran to desist from achieving higher production creating uncertainty at the heart of the OPEC.
Oil Price Stability a Boon for Emerging Markets
The agreement between Russia and OPEC is to freeze production levels rather than a cut, which has in fact eased the market's anxiety about falling prices but also caps the possible rise of oil prices, as supply of crude will continue to exceed demand. Saudi Arabia has dismissed talk of a cut as there is lack of trust amongst producers and only through international cooperation could a production cut be effective. The risk being that while a group producers cut output it can create an opportunity for other nations to gain market share at the expense of the first group.
Non-energy exporting emerging markets can continue to enjoy the benefits of cheap crude prices for the time being while producers appear to have finally stopped the decline. If this first effort at cooperation is successful it could signal a turnaround in the energy markets boosting economic growth in those nations.
- Russian News Agency, February 26, 2016.
- 2015 OPEC Annual Statistical Bulletin.
- Baker Hughes North American Rig Count February 26, 2016.
- U.S. Energy Information Agency (EIA) Iran Overview.