Oil prices slumped by more than 5% on Monday after OPEC decided to not cut production. The decision ultimately has sent crude to its lowest level since the depths of the global financial crisis almost seven years ago.
Shares in energy companies lost ground as the impact of the drop in oil prices rippled through stock markets. Prices of other commodities also weakened following disappointment among traders on OPEC’s Friday decision.
Industry research and consultancy firm Wood Mackenzie noted that “the 4 December OPEC meeting ended without a decision to cut production and without an agreement to raise the output ceiling. Instead a vaguely worded communique was released and a short press conference held. The group is apparently ratifying current output levels and an attempt was not made to adjust the target for Indonesia’s re-joining OPEC at this meeting.”
“OPEC went for the no surprise outcome, no output cut, but rumours of possible production cuts and even an increase in the ceiling flew through the OPEC rumour mill ahead of the Friday afternoon press conference. That part was great political theatre and reflected the disagreements in the group. While it is taking longer than expected and prices are falling more than OPEC may have hoped, the group is going to continue its policy of seeking market share and letting the oil price sort out the winners and losers. “
The outcome is not a surprise because Saudi Arabia has made it clear since the November 2014 OPEC meeting, “that it will not cut its output unless other producers such as Iran, Iraq, and Russia also reduce theirs.”
Here are Wood Mackenzie’s take away points from Friday’s OPEC meeting:
- The 30.0 million b/d OPEC production ceiling is irrelevant since we estimate Q4 2015 OPEC production is 1.2 million b/d higher than this level at 31.2 million b/d. This does not include Indonesia’s production although as of this meeting it has re-joined the group. During 2016 OPEC output will continue to increase but at a slower rate than in 2015. Both Iran and Iraq are forecast to increase in 2016. We do not expect Saudi Arabia to surpass its highs in output seen this year.
- At the press conference after the meeting, OPEC president Emmanuel Ibe Kachikwu focused on the uncertainty about Iran’s production during 2016 as a key driver for the decision not to change anything at this meeting. It will wait until a meeting between now and June to consider a new production ceiling. The OPEC president mentioned another meeting could occur before the now scheduled 2 June 2016 meeting. The theme of seeking cooperation from non-OPEC was also underscored at the OPEC meeting.
- The shift in the oil market balance we expect to occur during 2016 is still underway and not expected to change as a result of the OPEC meeting. Total global oil supply is forecast to decline slightly in 2016 compared with a record breaking projected increase of 2.4 million b/d for 2015 year-on-year.