Understanding lower Oil Prices 
OPEC Is Ready to Rumble 
Over Saudi Output Pressure is building on Saudi Arabia to rein in its oil output after a year of pumping full tilt, setting up the most contentious OPEC meeting in years.
A year ago, the Organization of the Petroleum Exporting Countries surprised markets with a Saudi-led strategy of keeping output high to win market share and squeeze presumably weaker rivals in the U.S. and elsewhere out of the market.
But with those rivals proving resilient and prices falling to new lows, members including Iran have decided the effort was a failure and are preparing to press Saudi Arabia directly to pull back on production at the group’s meeting this week.
Discontent is even building inside Saudi Arabia over the strategy. Still, the oil-rich kingdom isn’t likely to relent
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—in part because it is wary of rising Iranian output as sanctions are lifted. The result is likely to be a continued standoff that keeps the market glutted and prices weak.
“The global surplus still exists and there is still a strong possibility that oil prices can retest the lows made during the downturn,” said Dominick Chirichella, an analyst at the Energy Management Institute in New York, in a note last week.
Tensions within OPEC have mounted
as Saudi Arabia contributes to a global glut of oil with record production levels.
Crude prices, weighed down by the oversupply, have averaged $56 a barrel in 2015, down from $97 in 2014, gutting the finances of OPEC members such as Venezuela, Algeria and Angola and threatening their ability to keep up production.
This week, Iran is expected to demand that Saudi Arabia cut back from production levels of more than 10 million barrels a day.
“At the next OPEC meeting, [Iran oil minister
Bijan Zanganeh] will urge Saudi to reduce its production,”
Ali Kardor, head of investment at the state-run National Iranian Oil Co., told The Wall Street Journal on Saturday.
Mr. Zanganeh and the Iranian oil ministry couldn’t be reached for comment.
Venezuela, Nigeria and Angola are also expected to force discussions over production cuts.
Saudi Arabia, which long acted as swing producer supporting the market when necessary with output cuts, has signaled it won’t alter course. Its new approach is a long-term strategy designed to force out supplies from non-OPEC producers thought to need higher prices to keep pumping,
such as those getting crude from deepwater projects and oil sands.
Privately, Saudi officials acknowledge they too have been distressed
by the persistence of low oil prices, which has forced the kingdom to spend down some of its reserves of hard currency. They are considering their options “because there is a growing discontent in the kingdom about the low oil price,” said an oil official from a Persian Gulf country.
But Saudi Arabia is unlikely to consider cutting until June 2016 at the earliest, when Iran’s ability to return to the market and the effect on prices becomes clear, analysts and officials say. Answers to questions about demand, especially surrounding an economic slowdown in China, the world’s biggest consumer of energy, will also be clearer then.
“It will be likely a heated meeting,”
said an OPEC delegate from a Persian Gulf country. “But OPEC will not change course unless there is a commitment from the main non-OPEC producers to cut.”
Saudi officials didn’t respond to requests for comment.
Analysts say the kingdom likely has enough of a financial cushion to weather the low oil prices for now.
The most likely outcome of the meeting, OPEC delegates have said, is an increase in the group’s production target to about 31 million barrels a day, up from 30 million barrels a day, to accommodate the re-induction of Indonesia to the group—a move that won’t change the world’s supply-demand balance.
Persian Gulf oil officials have said they want stable prices between $60 and $80 a barrel, without price spikes back up to levels that support high-cost producers.
Achieving that balance is difficult, analysts say. Overall, global investment in exploration and production has fallen by 20% this year, reaching levels last seen in 2011, according to the International Energy Agency. American production has declined almost half a million barrels a day since April, according to the U.S. Energy Information Administration. U.S. output averaged 9.1 million barrels a day in October.
A huge, unmanaged fall in non-OPEC production could set up a “shooting themselves in the foot scenario” in which prices spike more than the kingdom wants, Norway’s DNB Bank ASA said in a note last week.
On the other hand, DNB said, producers such as BP PLC, Royal Dutch Shell PLC and others say they have reduced the costs of their operations to be profitable at lower prices. That could usher in a period of prices below what Saudi Arabia wants.
“If all these companies succeed, the normalized oil price may be even lower,” DNB said.
U.S. crude for January delivery settled at $41.71 a barrel Friday on the New York Mercantile Exchange, while Brent crude, the global benchmark, ended at $44.86 a barrel.
Another factor keeping prices low, analysts say, is the price war that has broken out among OPEC members. Saudi Arabia and Kuwait are offering to pay for the shipping and even insurance on deliveries for customers in Asia, where the competition has been particularly fierce. The competition has also spread to Europe.
That outlook is testing OPEC’s most vulnerable members.
Venezuela, which has some of the world’s largest crude reserves and depends on oil for about 95% of its annual government revenue, has seen production fall by about 350,000 barrels a day since 2008, to about 2.6 million barrels a day, according to a recent study by the Center on Global Energy Policy at Columbia University.
Angola was forced to slash its 2015 budget by a quarter.
“No one is happy with the current situation,” said a Persian Gulf country official. “The lower oil prices are lasting longer than initially expected and everyone wants the price to bounce back up soon.”
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