Chapter IVOPEC’s Strategy towards Non-OPEC Shale________________________________________The oil market had been performing well in the global market after the financial crisis of 2008. The supply of oil was sufficient, stocks adequate and, most notably, prices averaging at just over $100/barrel had been a good for the producers and consumers, as well as for the investors. There was no need to make any alteration to the prevailing policy measures as far as the Organization and its Member Countries were concerned. Continuing with their production ceiling of 30 million b/d proved to be the best option. The goal of OPEC is to set the oil prices and also see that the prices are stable.
When prices are too high, OPEC’s customers or the petroleum importing countries suffer economically as they pay a larger sum for importing oil and this leads them to cut back on energy use and search for alternatives to oil. But if prices go too low many exporting countries face huge financial problems because they plan their economies depending upon oil staying in a certain range. There has been instances in the past when the price of oil has fallen either because of falling demand or due to some geopolitical events. In such cases OPEC members led by Saudi Arabia had stepped in and tried to control the market and the price by increasing or reducing oil production.
Thus, playing the role of a swing producer. The recent fall in the oil prices of 2014 due to various factors has not made the members adopt the same policy that they did in the past. In fact they have shown very little or no interest in stepping up the prices. The present chapter discusses the OPEC as an influential force for the oil market. The chapter elaborates upon the oil market and signi?cant episodes of price declines prior to 2014. It further talks about the fundamental changes in the market and policy shift of OPEC since 2014.
The Saudi oil minister, Ali al-Naimi in an interview declared that Saudi Arabia would “never” cut production, despite the steep drop this year. We are going to continue to produce what we are producing. We are going to continue to welcome additional production if customers come and ask for it.” The Organization stressed that it could not independently solve the glitches of the oil market and it should not be expected to do so. OPEC’s Secretary General, El-Badri, had stated at international energy fora that the Organization was ready to talk to anyone if there was common desire of achieving a fair and orderly oil market that benefited all stakeholders. There is a need for coordination among various stakeholders to address the challenges.OPEC and the Oil GlutThe 166th ordinary meeting in Vienna in 2014 was the most important meeting since OPEC’s historical meeting in late 1973 when it decided to take over the pricing of its crude from international oil companies.
The signi?cance of the two meetings rests on the fact that their outcomes shifted the paradigms in the market and created new orders. The 1973 meeting transferred the power of pricing crude oil from international oil companies to OPEC. In the 2014 meeting OPEC decided it will not continue to manage supply in the market to support falling oil prices. This decision by the OPEC members in a way, signal for the market that there is no swing producer to the save the oil market. It was clear from that decision that OPEC willingly transferred the limited control it had on oil prices to the market. Saudi Arabia emerged out of the 166th OPEC meeting as a victor, as it succeeded in forcing a new policy upon the group that was different from its traditional role. It was unprecedented for OPEC to let the market fully determine prices. It was also unusual for OPEC to suddenly not give support to any base prices and allowed it to experience sharp decrease.
It has been believed that OPEC had its consumer in its hold and that it manipulated the prices by fixing the production levels till the price fall of 2014 which changed the scenario for the member countries. The 2014 slump in the price had shown that no one can dominate the market forever in the global market. The events of 2014 could be seen as a turning point in OPEC’s control of world oil prices, it showed that OPEC instead of controlling the market and making its own decisions was now hopeful that the prices would somehow recover by aligning itself with the market conditions. OPEC as a cartel has been facing many inherent problems and tensions because of member’s difference in socio-economic and political ideals. Over the years, it had been observed that OPEC does not control majority of production and that there has been rise of non-OPEC production. Thus, the desire to set prices would work only if OPEC sets a price and defends it by increasing production if the price is above the target and by reducing production if the price is below the target. But this strategy would not be easy to achieve as the allocation of OPEC production and its adherence to an agreed set of production level or quotas created problems due to non-adherence to what was agreed upon by OPEC members.
The November 27, 2014 decision by OPEC, despite some objections by smaller producers, to hold current production levels and let market forces determine oil prices was the beginning of OPEC’s realization that its global role has changed. “OPEC has not increased its production over the past ten years,” with its level being around 30m b/d, “while non-OPEC has increased its production over this period by around 6.5m b/d.
” The additions from non-OPEC were nearly all from high-cost production areas. If OPEC had cut production in November, it would probably have to cut again in 2015 and 2016, with non-OPEC benefitting from OPEC’s cut if prices rebounded. OPEC emphasized that this decision was not targeting any other producing country, stressing that it was a purely an economic decision.
” Suhail Mohamed Al Mazrouei, United Arab Emirates (UAE) Minister of Energy,stressed that OPEC would not be resorting to cutting its oil output, stating that it expects higher-cost producers outside the Organization to do so. The Minister explained that by not reducing output, the Organization was telling the market and other producers that they needed to be rational. FatihBirol, Chief Economist of the International Energy Agency (IEA), said most of the supply glut had actually come from two IEA members, the US and Canada, and also highlighted the weakness in global demand growth. Khalid Al-Falih, President and Chief Executive Officer of Saudi Aramco, said the previous higher price environment had fuelled the non-OPEC supply growth and, along with efficiency, had “crimped demand growth to levels that do not match the supply growth.” The end of 2014 OPEC oil policy led by Saudi Arabia entered a new phase when the Saudi oil minister at that time, Al-Naimi, took a decision to prioritize market share in the face of huge market imbalance and in the absence of any collaboration from other OPEC members and non-OPEC countries. Not ceding market share to high cost and inefficient producers was the motto of the day.
The 166th Meeting of OPEC, 2014 and OPEC StrategyIn the backdrop of falling oil prices and market uncertainty the OPEC members met on November 27, 2014 to decide upon the market condition. It was decided to maintain their collective production level of 30 mb/d despite falling oil prices. It said “taking a note of the concern over rapid fall in the price of the oil in the recent months, the conference agreed that for the world economic wellbeing it was not just important to have stable oil prices for economic growth but also gave producers a decent income and allowed them to invest to meet future demand. Therefore in the interest of restoring market equilibrium, the conference decided to maintain the production level of 30.0 mb/d, as was agreed in December, 2011.
The conference also noted that although there had been forecast for increase in world oil demand during 2015 but this would be offset by the projected increase of 1.36 mb/d in non-OPEC supply.” The OPEC Reference Basket had been fairly stable with the annual average ranging between $105 and $110/barrel, but since mid-June 2014 it had lost nearly 30 per cent of its value or more than $30/b. Suhail Mohamed Al Mazrouei, Minister of Energy of the UAE, stated that “the oversupply came from the evolution of unconventional oil production and everyone needed to play a role in balancing the market, not OPEC unilaterally.” With this decision OPEC was expecting that the higher marginal producers especially the U.S.
shale would react first on the assumption that an extended period of lower oil prices to around $60 per barrel by 2015/2016 would erode pro?ts for even the cheapest suppliers of crude from U.S. However, sustained lower oil prices threatened some OPEC members too and put further strain on OPEC’s unity. These included Nigeria, Iran, Venezuela, Libya, and Iraq in the short term and others like Algeria, the UAE, Saudi Arabia, and Kuwait in the longer term. The latter countries had accumulated signi?cant ?nancial reserves during the years of high oil prices. All these countries relied on high oil prices to ?nance their budgets and Saudi Arabia to continue building and maintaining spare capacity. But with new policy adoption to secure the market share from the non-OPEC producers like U.
S. shale oil these economies would be impacted. The consequences of this new market-share strategy if it is strictly followed to by all members are that other key non-OPEC oil producers such as Russia and Mexico might face recessions and pressure on their currencies forcing them to seek market share through price discounting. This would add even more pressure on ?scal-stressed OPEC members to do likewise to maintain their own market share.Crude oil prices fell sharply in 2014 as robust global production exceeded demand. After reaching monthly peaks of $112 per barrel (bbl) and $105/bbl in June, crude oil benchmarks Brent and West Texas Intermediate (WTI) fell to $62/bbl and $59/bbl in December, respectively for the first time since 2010, there was a hope that the OPEC would step in and cut its production in order to halt the crashing prices. OPEC indicated that any supply cuts that might be needed to rebalance the market should come from U.S.
producers instead of OPEC or Saudi Arabia. As the member countries had very little choice as their stability was dependent at a higher oil price. The budget stability of member countries varied with some like the Gulf countries having lower price whereas others needed slightly higher prices to sustain their economies, in a low price scenario it would be challenging for them to keep their budget deficits in control. Though the idea was to drive the expensive shale oil producers out of the market by not reducing the production and to maintain its market share. But its impact could be felt by the OPEC members themselves. As these countries are hugely dependent on revenue generated from oil export and at such low prices it would be difficult to manage, especially under the current circumstances, the West Asian region is in turmoil because of ongoing domestic war. Libya has been in chaos, Iraq fighting the ISIS and Iran had just come back to the oil market after removal of partial sanctions, which is again jeopardized by the President administration.
The recovery has vindicated Saudi Arabia’s 2014 decision to abandon attempts to control markets. Oil markets were taken aback when OPEC failed to announce a cutback in its production levels at its November 2014 ministerial meeting. Saudi Arabia recognized that the influx of shale oil in the market, was a game changer. Previous decisions by OPEC to cut supply and boost prices would no longer work since the group would only be giving space for shale in the market. Saudi Arabia maintained that the only remedy for low prices was to preserve market share and push prices even lower, which would make high cost supplies like shale oil uneconomical. But this was objected by almost all members except Gulf Cooperation Council countries. Saudi Arabia had been piloting OPEC toward acceptance of a more market driven policy for some time and tried to convince fellow OPEC members that the producer group needed to adjust to changing oil market dynamics.The OPEC countries riding high on the increased prices over the years had set higher ranges for a fair oil price that could be acceptable to both consumers and producers.
Saudi Arabia the OPEC de facto leader known for its moderate views on prices, considered oil price of $70–$80 as a fair price for almost 2 years, before considering $100 as a reasonable price. The $100 became the ideal price for a majority of OPEC countries in 2012 and 2013. The rise in prices over the period 2011–2013 was not the result of market fundamentals but it was mainly driven by geopolitical factors like the sanctions on Iran, the recovery of oil fields from ISIS in Iraq, Libya had managed to lift its production to around 1 million bpd, but risks still persisted with rival factions fighting for control and suddenly disrupting oil facilities’ operations and oil export terminals. Production came to a halt either fully or partially in countries like Libya, Syria, Yemen, Nigeria, Iran, and Iraq. The Energy Information Administration (EIA) estimated that global unplanned oil disruptions grew by 2.8 million barrels per day over the period January 2011 through July 2014. At the beginning of the fall, there was a conviction in the market that OPEC would cut its production to defend the $100 oil price it viewed as fair.
This conviction lasted until November 27, the day of the 166th ordinary meeting of the organization wherein the members agreed to keep the organization’s production target intact at 30 million barrels, which meant that the OPEC ministers decided to let the market balance itself. Oil prices continued their slide following the meeting, hitting 6-year lows. But this was not the ?rst episode for oil prices to record a drastic fall of more than 30 per cent. The oil market witnessed six signi?cant episodes of price declines since oil contracts were ?rst traded on future markets in 1983. The fall in the price of oil of 2014 was the third largest drop over the last 30 years after the price drop of 1985–1986, and 2008, as a World Bank report noted. The difference between the three episodes was that OPEC in 2014 for the ?rst time reacted by letting the market ?x the imbalances.
But the oil market was not in balance during the second half of the year due to many factors like the surge in production from outside of OPEC driven by an increase in the output of shale oil mostly from North America and other non-OPEC producers. U.S. crude oil and other liquids (biofuels, NGLs, and re?nery processing gains) grew by 4 million barrels a day between January 2011 and July 2014, of which 3 million barrels was crude oil. The output from outside the group was growing due to the increase in North American production and also from within the group it was growing because of the return of shut-in Libyan production and improvement in Iraqi output. The difficulty of the situation in the market was re?ected in the length of the actual meetings of OPEC ministers on November 27.
The group at the end decided to keep the production unchanged.Saudi Arabia emerged out of the 166th OPEC meeting as a victor, as it succeeded in forcing a new policy upon the group that was different from its traditional role. It was unprecedented for OPEC to let the market fully determine prices and discover a new base price yet OPEC conceded to the power of Saudi Arabia at the end and accepted the new policy forwarded by it.The fall in oil prices, from a peak of $115 per barrel in June 2014 to under $35 at the end of February 2016, had been one of the most important development of the recent times.
The sharp fall was similar to the decline in 1985-1986, when OPEC members reversed earlier production cuts, and in 2008-2009 at the outset of the global financial crisis. The 1985-86 decline was mainly supply-driven, while the drop in 2008-2009 was due to a collapse in demand. Both price episodes of 1985–1986 and 2014 occurred due to a surplus of crude in the market that followed an extended period of supply growth from outside of OPEC. But this price decline appeared to be a mix of the two.
The 60 percent fall between June 2014 and January 2015 resulted from weakening demand, increase of supply from outside of OPEC, appreciation of the US dollar, easing of geopolitical concerns, and speculative activities in the oil paper market. The 1986 price crisisSince the fall in price of oil in the world market it was believed that the market situation in 2014 was similar to that of 1986. Both price crises occurred after an extended period of high oil prices. The price fall of 1986 was the result of OPEC’s attempts to raise and defend high prices between 1973 and 1985. Oil prices increased by four times between 1973 and 1976. Prices were on a continuous decline between 1980 and 1985.
With high oil prices, supply from new and more sources in non-OPEC producers increased over a long period of time as a result of increased investments. In both 1986 and 2014, the market experienced an oil glut. The challenge for OPEC during both events is the same, with non-OPEC barrels displacing those from OPEC.
At the start of the 12-year period that ended in 1985, the share of OPEC in total world’s oil production was 65 percent. By the end of the period, it fell down to 40 per cent in 1985. Turning to the 2014 crisis, the concern of OPEC producers from supply growth from outside of the group was mirrored in a speech by the group’s Secretary General El Badri in Manama, Bahrain. Since 2008, non-OPEC producers were able to raise supply by almost 6 million barrels a day.
In contrast, OPEC’s production has been steady at around 30 million barrels a day during that period. A World Bank report found that the North Sea and Gulf of Mexico added 6 million barrels a day of crude over 1973–1983, an amount similar to the crude that was added between 2004 and 2014. For OPEC to defend high oil prices in 2014 meant that the unconventional revolution would stay for a longer period, exerting more pressure on the world’s oil market and prices. The shale oil revolution supported by high oil prices in the period 2010-2013 had allowed the USA to regain some of its lost oil power as its production grew from 7.5 million barrels a day in 2010 to 10 million barrels by end of 2013.
No country in OPEC was able to add that much of oil over the same period, not even Saudi Arabia which opened the taps to compensate for the loss of production from other OPEC members in the aftermath of the Arab Uprising in 2011. The 12-year period prior to the 1986 price fall was a period when OPEC used to set crude prices unilaterally. This power does not exist currently and prices are now determined by market forces. 2008 CrisisThe 2008 episode originated because of the collapse in demand for oil that followed the negative developments in the ?nancial markets and the speculative activities that grew with huge volumes of traded paper oil barrels.
The 2008 price fall was shaped by demand contraction resulting from economic downturn and an extension in oil inventories that exerted downward pressure on prices. The 2014 price collapse was a complex situation for the producer group, as both OPEC and non- OPEC were competing for a modest demand growth, with the latter experiencing an expansion in its production. Adding to the supply-side changes was Saudi Arabia’s subsequent historic announcement that it would no longer play the role of a swing producer.
It would no longer lower production when prices fell sharply, and increase output in response to large price surges. As the oil price decline continued in the second half of 2014, many OPEC members repeatedly signaled a regime switch, indicating they opposed cutting output and intended to defend market share. Saudi of?cials have indicated their belief that shale producers’ costs are high (approaching $100), that Saudi costs are less than $10, and that market equilibrium should be restored by reductions in supply from high cost producers. Playing the role of swing producer was coming at a growing cost to both current and future generations of Saudi citizens. Non-traditional suppliers had increased their market influence, non-OPEC producers continued to plan high output, and some OPEC members failed to adhere to their production ceilings. Given all this, Saudi Arabia could no longer be expected to incur the growing short- and long-term cost of being the stabilizing market force that it had been for decades.
The outcome of the November 2014 meeting opened the door for a new role for OPEC and a new paradigm for the market as the oil market was becoming a free market for the ?rst time, as noted by a US energy envoy. However, the decision not to adjust production levels opened the door for criticism as some observers of the situation believed that OPEC was committing a mistake that might lead to a long cycle of suppressed oil prices. The justi?cation for such a belief is found in the cycle that the market witnessed between 1986 and 2000, which resulted from OPEC’s mismanagement of oil pricing in the ?rst half of the 1980s. The collapse of 1985–1986 originated when OPEC changed its policy after Saudi Arabia abandoned its swing producer role to secure a higher market share, by unilaterally raising production and offering competitive pricing for re?ners. The ?rst attempt of Saudi Arabia in 1986 to defend its market share at a time of falling oil prices and rising non-OPEC supply had an adverse effect on prices.
With such an experience of past the success of the attempt of 2014 was doubtful. OPEC in 2014 was facing internal challenges to implement the new strategy. The group in their 166th meeting did not de?ne the size of the share each member should secure. As a result OPEC members for the ?rst 6 months following the meeting were operating on the bases of maximizing their share to the most possible extent, as the monthly production numbers of the group issued by the Secretariat in Vienna showed. Saudi Arabia and Iraq for example, raised production to levels not seen in the past 30 years. Another problem with a market-share strategy which allows the market to balance itself is a long – term phenomenon. The IEA argued in its monthly oil report in May 2015 that the battle for market share was just starting with all producers in OPEC and outside of the organization either increasing their production or not seeing any impact on their output from the fall in prices by end of April 2015, in which global crude oil supply rose by 3.2 million barrels a day on annual basis.
However, the IEA acknowledged that shale oil producers started to show signs of reduction in their standoff with OPEC due to months of cost cutting and a drop in the US rig count. For a group of producers that is known for internal rifts any decision that OPEC takes regarding long-term strategies is met with doubts. The reason for this is that most of the producers within the organization are known for focusing on short-term gains by maximizing their pro?ts from oil sales. The market-share policy was not welcomed by the other producers who favored defending prices.
In less than 6 months since the meeting, Iran and Libya called for OPEC to return back to its previous role to defend prices by cutting production. Changing the mind-set of other producers within the organization was not an easy task as Iraq, Libya, and Iran suffered from low exports due to political or security constraints. Other producers like Venezuela and Nigeria depend heavily on high oil prices to meet their ?scal obligations.
Shifting the group from a swing to dominant role to preserve its market share is a cumbersome task in a world where technology has pushed the boundaries of production, and the market shifted from scarcity to abundance over a few years.Only Saudi Arabia and its GCC allies were in a strong ?scal position to pursue the policy and role and endure its ?nancial consequences. The 166th meeting was a turning point for OPEC. The ministers agreed in their meeting that the market was oversupplied as the communiqué showed and this condition might persist in 2015 as non-OPEC supply was expected to increase by 1.36 million barrels a day at a time when stocks in OECD countries are already above the 5-year average. In June 2015, all OPEC members agreed to continue with this new market-share defense policy and kept their combined daily production target at 30 million bpd. The assumption that Saudi Arabia would balance the market on its own proved wrong as it signaled its unwillingness to cut output unilaterally.
The November 27, 2014 decision taken by OPEC made it clear that it had once controlled nearly half of the world’s production was voluntarily transferring the limited in?uence it had on oil prices to the market and abandoning the swing producer role. Assuming the role of a swing producer was not an easy task as it came at the expense of the group’s market share. The share of non-OPEC producers keep growing, thus limiting OPEC’s power to balance the market and sustain high oil prices that would allow the group to maximize its pro?t. Saudi Arabia has taken most of the burden to balance the market.Impact of November 2014 decisionSince the 1970s Saudi Arabia has balanced the market and stabilized the prices by raising or cutting production. On November 27 2014 when it decided to defend its share from high cost shale oil, the price fell sharply.
Following which, some shale producers cut back on drilling and new production in response to plunging oil prices. The well drilling has dropped in North Dakota’s Bakken shale and Texas’ Permian Basin, and there were estimates of falling new oil production. Data from Drilling info showed a gradual 13 per cent decline in new oil production capacity drilled, from about 600,000 barrels per day (bbl/d) in May 2014 to just under 525,000 bbl/d in January 2015.
The number of new wells drilled fell from 1,967 in May to 1,338 in January 2015. The largest drop, 24 per cent, came between December and January, as oil prices hit their lowest levels. The clearest signs that low prices were undercutting new production come from West Texas’ Permian Basin, where, after a long surge in investment and vertical and horizontal drilling since 2011, incremental new oil production was down by 16 per cent between May 2014 and the end of January 2015. Drilled but uncompleted wells are wells that have been drilled by producers, but have not yet been made ready for production. The full completion process involves casing, cementing, perforating, hydraulic fracturing, and other procedures to make the well ready to begin producing oil or natural gas. Following the large decline in oil prices since mid-2014, new drilling and completion activity slowed, and the number of DUCs in oil-dominant regions increased.
A high inventory of DUCs has implications for the size and timing of the domestic supply response to changes in oil prices, with or without significant changes in the number of active drilling rigs. Although both drilling and completion activity have declined since late 2014. June 2015 meeting The 167th meeting of the OPEC countries in June 2015 decided to keep OPEC output intact at 30 million barrels a day. With every member country entitled to produce the desired volumes it wants, the ceiling that OPEC imposed on itself is somewhat meaningless. The group’s communiqué issued following the meeting stated that, the conference advised member countries to follow to the self-imposed ceiling. The ceiling itself was not a production target, rather a guideline for the group as the Secretary General of the organization told the press following the meeting. When OPEC was created in the 1960, it was built to be a price stabilizer that adjusts the production of its members to eliminate any surpluses from the market.
There was no mention of any individual quotas set for those seeking to re-enter the market and claim their market share like Iran. In a market where non-OPEC production was expected to continue increasing at a pace higher and faster than the rise in demand and OPEC’s supply growth, the organization had few alternatives at the time of the meeting. Faced with a glut that was putting downward pressure on prices, some OPEC ministers supported a proposal by Algeria to cut the group’s production target by 5 per cent, while others supported the Saudi-led proposal of defending market share. It was not the ?rst time for OPEC to confront an oil glut, but it was the ?rst time for the group not to participate in restoring the balance. The OPEC market-share strategy led to declining oil prices.
Investments worth billions of dollars were shelved by international oil majors. In its annual assessment, the Oil and Gas Journal expected spending on U.S. oil and gas projects to drop by 26.8 per cent this year on annual bases to a total of $261.99 billion, bringing total spending close to its 2008–2009 levels of at $260 billion. The number of oil drilling rigs went down sharply.
Immediately after the meeting, it was understood that OPEC no longer wants to be the swing producer and pricing power had now shifted to the market forces. The decision meant that Saudi Arabia and OPEC would no longer be the mechanism to balance the market from the supply side. There were growing hope in the market that the fall in prices would force OPEC to reassume its traditional role of market balancer. However the market lost hope when oil ministers from Kuwait, UAE and Saudi Arabia all stated late in December 2014 that they would not cut production no matter how low prices reach. The three ministers made it clear that OPEC would now try to protect its market share in face of the rise in production from outside the group.
With OPEC’s main producers signaling they would not cut down production, the market went into another wave of panic that sent prices lower, in the range of $50’s. The market was on a new path to search for stable pricing for OPEC and others. Impact of 2015 DecisionNon-OPEC producers in 2015 showed resilience to the collapsing oil prices. The increased investment and cost-cutting in the existing projects brought 1.4 mb/d of new supplies to the market. But by end of 2015 the growth had come to a halt with the sharpest decline coming from the U.S. After having an increase in U.
S. supplies, the oil production gains came to an abrupt halt in 2015 and was expected to drop by nearly 600 kb/d in 2016 and a further 200 kb/d in 2017. At the 2014 peak, more than 1 500 drilling rigs were running early 2016, the number of US drilling rigs had dropped to just 440. Shale and the New Swing Producer statusThe decision not to cut production at the OPEC November 2014 meeting was painful for both OPEC and the market. By the end of January 2015, oil prices were trading at a level lower than all what OPEC countries needed to balance their budgets. With declining value, the shale oil companies were looked upon as the new swing producers, it was indeed a new era for the market. The change initiated by OPEC was fundamental and structural to the extent that had Citibank form a new theory for the market where it replaced the call on OPEC with the term the call on shale.
The call on OPEC is basically the amount of crude required to be supplied by the group to balance the market. Citibank now argued that there is a new model under which it is the shale oil producers who would be balancing the market. The shale producers could adjust relatively rapidly in response to prices and access to credit, and this would determine the amount of shale oil producers would bring to the market. The UAE and Saudi oil ministers in their statements had said that high-cost oil producers are responsible for the fall in prices and the glut in the market and that they should be the ones to balance the market and not the low-cost and more efficient producers. Goldman Sachs argued that shale oil producers have become the marginal producers; thus they have more in?uence on prices than OPEC. The bank said in a report that “a tight global oil market had until now required strong OPEC production and US shale production growth.
Goldman Sachs argued that core OPEC members lost their pricing power. Pricing dynamics of oil have shifted to US shale oil producers as shale production was exceeding OPEC’s spare capacity. The shale oil companies are among low-cost producers and that they can compete directly with OPEC; they can drive the prices needed to balance the market lower than the prices that OPEC countries need to balance their ?scal budgets like Venezuela considers it be in OPEC’s interest to stabilize oil prices at $100 per barrel in the medium term. OPEC has to meet future battle for market share based on cost ef?ciency. Despite OPEC reiterating its stand of no production cuts during the June 2015 meeting, which continued its previous November 2014 decision, some analysts argue that no matter what OPEC decides about its own production target, the outcome would be more oil to be produced by all, irrespective of OPEC quotas.
This would principally come from Iraq and Iran which would add pressure on the organization which pumped 31.58 million bpd in May 2015, well above its 30 million bpd production target. It is not only OPEC members who would pump as much as they could if they have the spare capacity, but also non-OPEC conventional and nonconventional producers locked in a battle for market share with OPEC as both sides hope they prove to be the most ef?cient source of production and remain resilient. The role is normally associated with power and control over the market, but in practice, “the swing producer often becomes the passive absorber of shifts in market supply and demand”. The oil market has witnessed a major transformation and the birth of a new oil order after the 166th OPEC meeting wherein the prices have been left on the market. At the core of this new order are the U.S. shale oil producers who are now forced to be the new swing producers.
However, the structure of the shale oil industry is totally different than that of OPEC where coordination for planned cuts was more possible and effective to a large degree. The shale oil producers are fragmented and are highly indebted and sensitive to price ?uctuations.Impact of the Changed Market strategy adopted by OPECThe collapse in oil prices since June 2014, compounded by OPEC’s move to suspend its role as swing supplier at its November 2014 meeting, has forced large-scale revisiting and reprioritization of spending plans across the industry, resulting in lower production growth over the forecast period than previously expected. Overall, non-OPEC supply growth is now expected to be about 2.
8 mb/d lower compared with last year’s Report. The downturn in drilling has been particularly evident in the U.S., where the number of rigs dropped by more than 200 towards end of 2014. In early 2015, the North American operators filed for bankruptcy protection.The rig count was hovering at 1881 in 2014 but with fall in price it plunged to around 711 by 2015 and further to 634 in 2016. With the fall in price there had been fall in rig count bringing period of contraction in drilling activity. Individual shale basins are feeling the pinch to various degrees.
The Eagle Ford shale in South Texas, for example, had over 200 rig counts as of late 2014. That figure has fallen to just 46 as of early March. Oil production from the Eagle Ford has declined by 0.5 million barrels per day since the middle of last year. The Permian Basin in West Texas had over 500 oil and gas rigs at the end of 2014, a level that has plunged to just 158.
Oil production from the Permian had finally come to halt, and could begin to decline through the year. At the beginning of 2016, OPEC Reference Basket (ORB) price, with higher volatility, slumped below $30/b before moving upwards to again the mark of $50/b during June, signaling that markets were finally healing as declining U.S. output, falling U.
S. oil production. Putting OPEC and non-OPEC oil supply growth in recent years into perspective, it is observed that non-OPEC supply growth between 2008 and 2015 was more than 7.9 mb/d, of which the US (6.4 mb/d) constituted the significant part of it.
OPEC crude oil production growth over the same period was even negative. Doha Meeting, 2016In April 2016 major oil producers met at Doha with the aim to stabilize volatile oil prices that had plunged since mid-2014 and adversely impacted the oil-dependent economies. The oil price shock had led to a coalition wherein the producers were willing to freeze production levels in an attempt to reduce high levels of oil stocks. The Doha initiative was the first time in 15 years that OPEC and non-OPEC producers had united to come to an agreement on oil production.
In the meeting eleven of OPEC’s 13 members committed to freezing output and reassuring markets that a recent recovery in prices can be sustained. Iran did not send a delegation to the meeting saying it would not accept proposals to cap its production until it recovered a similar market share to that which it held before the sanctions were imposed. Non-OPEC producers included Russia, Azerbaijan, Kazakhstan, Colombia, Oman, and Bahrain. When Saudi Arabia and Russia met in February 2016 it was expected that the discussions would involve a potential cut in production by some OPEC and non-OPEC countries but it was later reduced when they opted for freezing the output at January levels instead.
The February agreement included just four countries (Saudi Arabia, Russia, Venezuela, and Qatar). Saudi Arabia’s oil minister, Ali al-Naimi said in February that “A freeze is the beginning of a process. If we can get all the major producers to agree not to add additional barrels then this high inventory we have now will probably decline in due time.” There was no clarity regarding the positions of Saudi Arabia and Iran. There were reports that said Saudi Arabia did not consider Iranian participation critical to the agreement, and this assured that an agreement could be reached. Saudi Arabia’s initial conciliatory attitude was however later overturned by Deputy Crown Prince Mohammed Bin Salman. He said that Saudi Arabia would insist that Iran joins the production freeze, and this prompted prices to drop from around $40.33/bblto $38.
55/bbl in April 2016. The April 2016 Doha meeting of major oil producers ended in dismay after Saudi Arabia’s Deputy Crown Prince Mohammed bin Salman abruptly blocked the deal to “freeze” oil production because Iran was not party to the formal agreement. From the start of discussions in 2016 Iran had ruled out participating in the production freeze on the grounds it needed to recapture lost market share and restore production to its 4 mb/d pre-sanction production level from just 2.
85 mb/d on average in 2015. OPEC 169th Ministerial Meeting, June 2016 There were no new policy agreements reached to either “freeze production” or set a new output target when OPEC arrived from its biannual ministerial meeting in Vienna in June 2016. But Saudi Arabia’s Energy Minister Khalid al-Falih reassured that the country would not flood the market in response to rising Iranian supplies. Saudi Arabia and its Gulf allies made an attempt by suggesting that OPEC set a new collective ceiling in an effort to repair the group’s fading importance.
But the meeting ended with no new policy or ceiling amid resistance from Iran. BijanZanganeh, the Iranian Oil Minister said that Iran would not agree to any new collective output ceiling and sought the debate to emphasize on individual country production quotas which have been abandoned by OPEC. He said that without country quotas, OPEC could not control anything. He insisted that Iran deserved a quota, based on historic output levels of 14.5 per cent of OPEC’s overall production.
OPEC has been pumping 32.5 million barrels per day (bpd), which would give Iran a quota of 4.7 million bpd that is well above its current output of 3.8 million, according to Tehran’s estimates, and 3.
5 million, based on market estimates. The Saudi Arabia led strategy of abandoning production cuts to bolster prices and the desire to maintain market share in the face of rising non-conventional oil supplies from the U.S. shale oil did not fulfil the aspirations as the price of oil kept falling. OPEC’s policy aimed at forcing more expensive shale oil to shut down had taken longer than expected.
Lower oil prices have continued to sharply reduce non-OPEC production. The IEA saw non-OPEC production falling by a steep 900,000 barrels per day (kb/d), led by the more than 1 mb/d drop in U.S.
production. OPEC projects a decline of just under 800 kb/d in non-OPEC production and the EIA estimates a 600 kb/d decrease. The EIA said lower non-OPEC production was largely driven by “U.
S. tight oil production, which had high decline rates and short investment horizons, making it among the most price-sensitive oil producing regions.” The EIA projected U.S.
crude oil production would decrease from the average 9.2 mb/d in the first quarter of 2016 to 8.2 mb/d in the third quarter of 2017, which would be 1.
5 mb/d below the April 2015 level. The EIA also forecasted that in addition to reduced U.S. supplies, the North Sea and Russia would post some of the largest declines in 2017. OPEC production in July 2016 was at historic levels with very high output from OPEC’s Gulf members. Saudi Arabia reported that its production reached the highest monthly level ever at 10.67 mb/d.
Kuwait and the United Arab Emirates also pushed output to record levels in 2016. Iran and Iraq had the largest increases in supply up 560 kb/d and 500 kb/d, respectively. OPEC had collectively increased production by a steep 2.1 mb/d since the November 2014 decision to abandon production quotas and pursue market share. Over the period Saudi Arabia raised output by 1 mb/d, Iraq by 950 kb/d, and Iran 800 kb/d.
By contrast, civil unrest in Libya and Nigeria has sharply constrained production capacity, down 400 kb/d and 370 kb/d, respectively. Political and economic turmoil in Venezuela has also sharply reduced production there, down by around 300 kb/d. GIVE FULL SOURCE AND ADD IN ENDNOTES…
Agreeing to a coordinated cut in production by both OPEC and non-OPEC states appeared unlikely and would take considerable effort from Saudi Arabia, Russia and Iran. The advent of shale has undermined OPEC’s traditional response to increase prices by reducing production, leaving the producer’s group in search of a new strategy to remain relevant.15th International Energy Forum (IEF), 2016 Algeria: OPEC’s 170th eXTRAORDINARY Meeting OPEC held informal talks on the sidelines of IEF due to increasing oil price volatility and the slow pace in rebalancing oversupplied markets. The Accord unlocked a new round of joint consultations between OPEC and non-OPEC producers that resulted in the landmark decision, Vienna Agreement, adopted at the 171st Meeting of the OPEC Conference in Vienna and on the 30th of November 2016. It noted that the oil price had collapsed since the last International Energy Forum (IEF) Ministerial meeting in May 2014. “The OPEC Reference Basket (ORB) price dropped by nearly $90/b, or 80per cent, between June 2014 and January 2016, from $11/b to below $23/b.
” And after this meeting OPEC announced an agreement to reduce crude oil production to a target range between 32.50 million and 33million barrels per day. The meeting saw OPEC Member Countries agree to the ‘Algiers Accord’, which committed the Organization to a new oil production target. The ‘Algiers Accord’ established the High-level Committee to study and recommend the implementation of the production level of the member countries. The agreement reached in Algiers was effective in arresting any further deterioration in prices and also helped reduce relative volatility. The OPEC Reference Basket climbed to above $49/b by mid-October 2016. The Algerian Energy minister H.E.
NoureddineBoutarfa, said that the oil market has suffered from a steep price slump over the last two years, resulting in adverse consequences for producing countries, at the same time not stimulating robust economic growth in consuming countries. Low prices are sowing the seeds of difficult times in the future, as upstream investment cuts will likely lead to further market instability. Low oil prices are detrimental to both producers and consumers. November 2016 meetingIt was believed that regardless of what happened to the oil price, there would be no reaction from Saudi Arabia.
But Saudi Arabia did react, signaling to the market that the low oil prices in January 2016 were ‘irrational’ and showing a willingness to cooperate with other OPEC and non-OPEC producers to balance the market. There was a need for higher oil prices therefore, the focus shifted on price stability and on avoiding any situation that could cause oil prices to fall or become more volatile. The shift in Saudi oil policy from pursuing a market share strategy to showing willingness to cooperate on an output cut or freeze as OPEC members were facing financial crisis and therefore need to reach an output deal with other producers.At its November meeting in 2016, OPEC changed its strategy in alliance with Non-OPEC oil producing countries, most notably Russia. It decided to cut global production by 1.2 mb/d to 32.
5m b/d from January 1. 2017 to push world oil prices higher. The non-OPEC producers were to reduce production by a total of around 600,000 b/d of which the Russian Federation was committed to lowering its output by 300,000 b/d.
The cut in OPEC production was officially reconfirmed in January 2017, when OPEC announced the new quota of 32.5 mb/d. OPEC announced that this quota will be valid until December 2018.
(OPEC 2017) wherein it agreed to reduce output from 33.24 mb/dto a level between 32.5 mb/dand 33 mb/d. The framework agreement was for only a relatively modest cut in output of 600,000 – 900,000 b/d for six months, which would not require significant sacrifices and Saudi Arabia, Kuwait, and the United Arab Emirates were expected to bear a major share of the production cuts. The financial imperative to increase oil revenue was driving the will to reach an agreement in November. OPEC producers had lost more than $1 trillion in oil revenue over the past three years, according to OPEC Secretary General Mohammad SanusiBarkindo.
OPEC’s decision to abandon its unrestrictive market share policy was recognition that the rebalancing of oversupplied markets was taking longer than expected and the suffering from lower oil prices had reached its limit. The member countries of OPEC reached the agreement because their economies which is heavily reliant on oil revenue had suffered due to continued weak prices of crude oil. The severe drop in oil revenue since mid-2014 was forcing members to adopt a more pragmatic and flexible approach in negotiations. The oil production cuts was an attempt to tackle the economic crisis being faced by the OPEC countries owing to a persistent fall in oil prices.The OPEC and Non-OPEC cooperation agreement reached at the end of 2016 was led by Saudi Arabia, Qatar, Algeria and Russia after numerous deliberations to control the falling prices.
The agreement was very difficult to reach with many complexities such as civil unrest in Nigeria and Libya that disrupted oil operations in their countries and arguments for special consideration for Iran. (OPEC, (2016), “OPEC Bulletin”, Organization of Petroleum exporting Countries, Online: web Accessed on 17 April 2018 URL: http://www.opec.org/opec_web/static_files_project/media/downloads/publications/OB11_12%202016.
pdf)On December 10, 2016, non-OPEC producers joined OPEC in agreeing to cut production. The 23 countries decided to reduce supplies by around 1.8mb/d and for the first time in the group’s history a joint monitoring system was established.
This led to improving oil prices and was anticipated to lead to a rebalancing of oversupplied oil markets. “The agreement has really stemmed from the sense international oil market which will lead to positive results, not only for producers and exporters, but also for the consumers and to the health of the world economy, which we all require,” said Al-Sada, Minister of Energy & Industry, Qatar. The meeting hailed as a Historic AgreementKhalid Al-Falih, Saudi Arabia’s Minister of Energy, Industry and Mineral Resources stated that “it was historic because of the number of countries that are participating from both OPEC and non-OPEC. This would bring stability, reduce volatility, encourage investment in the oil sector, and serve the interests of the global economy and not just the producers of the oil and gas industry. And it is historic given the fact it has been a process that involved extensive consultations, until we reached the conviction that everybody was not only willing to sign this agreement, but was also extremely enthusiastic in doing so, leading me to believe that compliance and implementation is going to be very high.” Speaking for the non-OPEC side, Alexander Novak, Minister of Energy of the Russian Federation, said: “This is truly a historic event and is the first time so many countries from different parts of the world producing oil had gathered together in one room to accomplish what we have done.
We believe that today’s agreement will speed up the rebalancing of the market. It will help stabilize the market and reduce volatility and speculation and improve the climate for new investment in the oil industry globally. Our actions have been carried out in both the interest of producers and consumers and the primary goal of what we have done here is to ensure a stable and safe supply of energy to the world economy.” OPEC – Non-OPEC Producers: An Effort towards Market StabilityThe market conditions threatened the economies of producing nations, hindered critical industry investments, jeopardized energy security to meet growing world energy demand, and challenged oil market stability as a whole. There was a need for collective effort among producers, both within and outside OPEC that would complement the market in restoring a global oil demand and supply balance.
Thus this paved the way for OPEC and non-OPEC cooperation. The Algiers Accord formed a High Level Committee which would facilitate a framework of high level consultations between OPEC and non-OPEC producing countries and assist them to have long-term dialogue. This would help them to identify risks and take pro-active measures to ensure a balanced oil market on a sustainable basis. A group of producers outside the Organization agreed to reduce output in an effort to bring market stability. Eleven non-OPEC producers along with OPEC Member Countries under a ‘Declaration of Cooperation’, agreed to a combined output reduction of 558,000 b/d. This amount was in addition to the 1.2 million barrels/day output reduction decided by OPEC at its November 2016 meeting.
It meant that from the beginning of 2017, 24 of the world’s oil producers would implement joint reductions of 1.8 mb/d to ease the oversupply in the market. “The Meeting recognized the desire of Azerbaijan, the Kingdom of Bahrain, Brunei Darussalam, Equatorial Guinea, Kazakhstan, Malaysia, Mexico, the Sultanate of Oman, the Russian Federation, the Republic of Sudan, and the Republic of South Sudan, as well as other non-OPEC producers, to achieve oil market stability in the interest of all oil producers and consumers. “In this regard, the above-mentioned countries offered to adjust their oil production, voluntarily or through managed decline, starting from January 1, 2017. The combined reduction target was agreed at 558,000 b/d for these producers. Abdullah Bin Hamad Al Attiyah, Qatar’s former Energy and Industry Minister called on non-OPEC oil producers to sit down with OPEC to try and solve the oil market’s problems. He stressed the point that OPEC was “powerless” to cure the market’s ills on its own. There have been encouraging statements from Vladimir Putin, President of the Russian Federation at the World Energy Congress in October 2016 in Istanbul when he said Russia was ready to join joint measures on reducing the production of oil and invited other oil exporters to do so.
For the U.S. shale oil, Alexander Novak, Minister of Energy of the Russian Federation said that “it is a question of competition between producing countries and that is the way we have to look at it. We cannot stop technological progress, it would still be happening. Productivity would also be growing as would other components of global competition. We just have to look at this situation realistically it is a global competitive market. We should not be looking at the US shale recovery as being the only factor.
And it should not stop us from taking action when we believe it is necessary. What we are aiming to achieve is to reduce instability in the markets and to speed up the supply and demand rebalancing and improve the attractiveness for investment.” Rebalancing the Oil MarketThe international oil market had been struggling to find equilibrium since oil prices fell in July 2014. The global oil market has witnessed a serious challenge of imbalance and volatility pressured mainly from the supply side. It was the longest down cycle in OPEC’s history and had left its mark in all parts of the sector, including huge manpower layoffs and serious consequences for future investment. It has led to significant investment cuts in the oil industry, which has a direct impact on offsetting the natural depletion of reservoirs and in ensuring security of supply to producers. Algeria’s Minister of Energy, NoureddineBoutarfa, told the OPEC webcast team after the Meeting that “global demand for energy would grow in the future so there was no choice other than to invest.
But to invest, one has to have money. And to have money, prices have to create incentive.” Limitations of the AgreementHowever, the agreement had some flaws. OPEC’s insistence that its commitment to reducing its own production was conditional upon the participation of major non-OPEC producing countries.
Of the non-OPEC producers only Russia was expected to marginally reduce production, with “pledged cuts” from most other countries largely reflecting lower output – due to normal decline rates at mature fields. OPEC’s hard-won production cuts were achieved through a combination of high-level political consultations by Saudi Arabia, Russia, and Iran; an unprecedented level of compromise. In the end, only 10 of the organization’s 14 members pledged to reduce production.
Unwilling to accept a cut in production, Indonesia suspended its membership. Temporarily, war torn Libya and Nigeria were exempted from the cuts. Current production levels were used in assigning new production allocations but resumption of some disrupted supplies from Libya and Nigeria would add more supply to the supply market offsetting agreed cuts by other members.
The strength of the OPEC accord lies in the commitment to reduce supplies by Gulf members Saudi Arabia, Kuwait, the United Arab Emirates, and Qatar, as well as Algeria, who all have a history of strong compliance. The five countries are expected to account for just under 900 kb/d, or over 75 per cent of the pledged cuts. Contributions from the other five members are less clear but may add a further 100 kb/d. KB/dAmong the Non-OPEC production cuts Russia was allotted a highest share and Russian Energy Minister Alexander Novak said the reduction would be gradual with production forecast for the end of March 2017 to be reduced by 200 kb/d, from the October 2016 record level of 11.2 mb/d, and by another 100 kb/d to 10.9 mb/d after six months. Pledged cuts from seven countries merely reflect expected lower production due to normal decline rates at mature fields and were already factored into the global supply outlook for 2017.
Mexico, Malaysia, Azerbaijan, Equatorial Guinea, Bahrain, Brunei, and Oman all have mature fields that were forecast to decline naturally, in part due to two years of lower capital expenditures. As a result, most analysts don’t expect the country to comply with its pledge and are forecasting an increase in the country’s production.Outcome The crude oil production cuts from OPEC and non-OPEC countries would reduce crude oil oversupply and support crude oil prices. Crude oil prices spiked sharply following a decision by OPEC to cut its oil production after two years of market share war with U.
S. shale oil producers. Oil futures prices for benchmark crudes breached the $50/bbl threshold on December 1 following OPEC’s deal to rein in production. Prices rose to the highest levels in 17 months after non-OPEC producers finalized their agreement. On the supply side the Non-OPEC production fell by 0.8 Mb/d, its largest decline for almost 25 years.
This fall was led by U.S. tight oil, whose production fell 0.
3 Mb/d, a swing of almost 1 Mb/d relative to growth in 2015. The 2014 oil price downturn caused the US unconventional oil and gas industry to undertake an array of cost-cutting measures affecting both capital and operational expenditures. Since OPEC had a poor history of compliance, for the first time the group established a committee to monitor implementation of new production targets. The joint ministerial committee comprised of OPEC members Algeria, Kuwait, and Venezuela, and non-OPEC Russia and Oman. OPEC Secretary General Mohammad SanusiBarkindo said “The establishment of the joint Ministerial Committee to oversee compliance, makes the Vienna Agreement measurable and verifiable” Who won the market share war?In 2015 beginning the shale oil producers seemed to be the winner as they were able to withstand the low oil price and they continued to increase their production with increasing efficiency, cost reduction and technology to help reduce the cost of production and increase the oil production. .
But this changed towards the end of 2015 and early 2016 when oil prices plunged sharply and shale oil producers felt the pain. There were more U.S. shale oil companies filing for bankruptcy and U.S. shale oil production’s decline accelerated. At that time, it was believed that Saudi Arabia was successful in keeping the shale oil producers under control.
But to maintain this, prices should be kept somewhere below 40 b/bl, and it needed Saudi Arabia to step up its production to maintain this price, but it could not afford to take the negative impact of low oil prices on its budget for a longer term. Saudi Arabia’s oil strategy was more focused on short-term results rather than achieving long-term goals. When oil prices were above $100/bbl it enabled shale oil to grow, with Saudi Arabia’s 2014 decision to flood the oil market and drive oil prices down made shale oil producers stronger. In his book, former Saudi Oil Minister Al-Naimi voiced skepticism about the readiness of Russia to join efforts made by OPEC to rebalance the market. This distrust was not baseless, as the Russians had pledged to share some of the burden but did not deliver in the past. The history of Russia and OPEC interactions have not been fruitful and led to lack of confidence among OPEC producers. In 1998, for example, the oil price fell following an OPEC decision in 1997 to increase output, the market impact of which was subsequently compounded by a drop in oil demand following the Asian and Russian financial crises. Brent oil fell from a high of $25 per barrel in early 1997 to below $10 per barrel in late 1998, leading OPEC to call for production restraint from OPEC and non-OPEC producers.
Russia assured a 7 per cent decrease in its production, but in reality its exports increased by 400,000 b/d. After the attack on World trade Centre in 2001 prices fell from $36 per barrel to a low of $20 per barrel. OPEC assured an output cut of 1.5 mb/d if non-OPEC countries reduced by 500,000 b/d. Norway, with production of 3.4 mb/d promised a cut of 100,000-200,000 b/d; Russia, with output at the time of 7.1 mb/d promised a 30,000 b/d reduction, then increased its offer to 50,000 b/d but ultimately delivered no reduction at all. The oil price plunge of 2008-09 from a high of $147 per barrel to a low of $39 per barrel led to talks between Russia and OPEC.
Igor Sechin the then Deputy Prime Minister with responsibility for energy, who attended three consecutive OPEC meetings as an observer, consistently encouraging production constraint from OPEC but providing no promises of help from Russia. Indeed, he claimed that Russia had cut output and exports during 2009, but the reality was that overseas sales increased by 700,000 b/d, much to the frustration of OPEC members. For OPEC to become more efficient and stronger it needs to be politically stable, and for this to happen Russia must be involved, and it must not turn its back on OPEC. Dr Mamdouh G Salameh, an oil economist based in London, said both OPEC and Non-OPEC would ensure that they abide by the cuts as all of them desire higher prices but he also agreed that they have a status of not following their production quotas when their budgets required more money. GIVE FULL SOURCE FOR THE GRAPH AND ADD IN THE ENDNOTES…
But both Russia and OPEC have realized that they needed to work together to save the market. This alliance was born out of necessity: Russia and OPEC need each other to combat the rise in power of the U.S. shale oil industry. They reached an agreement to freeze production but it didn’t materialize as not all OPEC members were onboard.
It was in Algiers where they agreed to reduce production in an attempt to curtail further decline in oil prices. But Russian oil companies are still resisting long-term cooperation with OPEC countries. That is understandable, as they are seeking higher profits and a bigger market share. This was clear in China, where Russian producers captured most of the increase in demand in the first eight months of this year, while Saudi exports to China fell. The result was that Russia became the biggest oil supplier to China this year, according to official customs data. In a world where shale oil and other unconventional sources of supply may destabilize the market, a stronger OPEC is needed to keep the global stability in place.
