Why Did Saudi Arabia Kill OPEC?

The OPEC meeting is only a week away, but the chances of a positive result are as remote as ever. Rising oil prices, the heightened rivalry between Saudi Arabia and Iran, and Saudi Arabia’s willingness to go it alone will make a deal all but impossible.

First of all, Iran is not in a cooperative mood. According to the IEA, Iran has managed to boost oil production to 3.56 million barrels per day in April, its highest level since November 2011. Oil exports also jumped 600,000 barrels per day to 2 million barrels per day. Importantly, Iran’s output now stands at pre-sanctions levels, a key threshold that the Iranian government says it needs to reach before it would consider any cooperation on production limits with OPEC. However, Iran thus far does not see it that way, insisting that it still has more ground to make up.

More importantly, however, is Saudi Arabia’s shift in attitude. In a once unthinkable development, Saudi Arabia is backing away from OPEC. The cartel’s largest, most important, and most influential member will leave the group rudderless. Countless obituaries have been written about OPEC since November 2014, but the new direction that the Saudi monarchy is heading in all but ensures diminished influence for the oil cartel.

Saudi Arabia’s spurning of OPEC has been building for some time. In November 2014 it abandoned any plans to limit production in order to prop up prices, a strategy to pursue market share that has led to some downsides, but has largely achieved its goals. Saudi Arabia has seen revenues plummet, but it is producing at record levels and outlasting rival producers. U.S. shale, for instance, is down about 1 million barrels per day (mb/d) from the April 2015 peak, and more than 70 North American drillers have gone bankrupt.

Moreover, even if Saudi Arabia was not embarking on this epochal change in the structure of its economy, there is little reason for OPEC to limit production at its upcoming meeting in Vienna. Oil prices are finally rebounding, up more than 80 percent from the February lows. Outages in supply from Canada to Nigeria have tightened markets. U.S. production is down 1 mb/d and will continue to fall for the foreseeable future. And even oil inventories appear to be leveling off.

“I don’t think OPEC will decide anything,” a source from a major oil producer in the Middle East told Reuters. “The market is recovering because of supply disruptions and demand recovery.” An OPEC delegate told Reuters that any changes to the cartel’s policy is off the table. “Nothing. The freeze is finished,” the OPEC source said.

Full article: Why Did Saudi Arabia Kill OPEC? (OilPrice)

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