OPEC, Vienna – how the balance of power is tipping

Christopher Johnson, Energy Community Editor at Thomson Reuters talks to Alec Hogg from London about possible outcomes from OPEC's meeting in Vienna today. As the winds of change blast the global oil producing community, it seems the power balance has tipped between the OPEC cartel, North America and other non-OPEC oil producers. The oil price trajectory is set to only get more interesting. – CP 

ALEC HOGG: The OPEC meeting is taking place today in Vienna to decide on what these one time, strong cartel, will do to try and address falling oil prices or not. Christopher Johnson, Energy Community Editor at Thomson Reuters joins us on the line from London. You've got a big team there looking, no doubt, at what's going to come out of OPEC, Christopher. Just, perhaps, if you could encapsulate for us why it is such an important meeting this year.

CHRISTOPHER JOHNSON: Well, this is suddenly the most important meeting we've had for, arguably, three or even four years. Essentially, what's happened is that OPEC has lost control of the marginal oil supply, which is really; that baton has been taken by North America because we've had an enormous increase, as you know, in shale production. Not just in the United States, but increasingly alternative technologies are producing more oil from places like Canada, South America, and in prospect, I think really from China and elsewhere.

This means that although OPEC, of course, is still pumping a third of the world's oil, it does mean that large volumes of oil are coming onto the market from elsewhere, and this means that there's a degree of less control in the hands of countries, like Saudi Arabia.

ALEC HOGG: If they only have a third of the world's oil is it, well clearly, it's not as powerful, OPEC, as it was in the past, but it must change the dynamics of the way that they approach this.

CHRISTOPHER JOHNSON: Well it does because, as you know, financial markets are set on the margin. That's to say, you know, you're going to have a burlesque argument, essentially. If you've got one penny too much, you're rich. If you've got one penny too little, you're poor and that really is the way financial markets work. Oil prices, at the moment, the discretionary extra barrel used to come from Saudi Arabia. These days Saudi, consumption itself is very high. Many of the OPEC countries are having increasingly large populations. They need the income from oil and they don't have that much leeway. Whereas a lot of the producers in North America, for example, if they can see a profit, they'll come in, they'll take the oil out of the ground, using fracking, and they will respond to prices.

That's where the margin is being fed. It is no longer the smoke filled rooms that we used to see in OPEC countries that are deciding on the price. That is a big challenge for Saudi Arabia and the other OPEC countries because they, of course, are very dependent on oil prices.

GUGULETHU MFUPHI: Christopher, just from an African perspective are the local producers here on the back foot perhaps?

CHRISTOPHER JOHNSON: Very much so, Africa has a number of very important oil producers. Nigeria, of course, Libya and Algeria, and Angola, these are all countries that are very dependent on oil prices. Probably Nigeria particularly, we've seen the devaluation of the currency. That is a direct result of the collapse of oil prices, over the last year. Lots of other things are in that equation as well but, clearly, the much lower oil prices are having a very critical impact on the budgets of all those countries.

ALEC HOGG: We've seen the oil price today, in particular, dropping another two percent, down to $76.00 a barrel, using Brent as the benchmark there. What's that telling us about the market's expectations of what will come out from Vienna?

CHRISTOPHER JOHNSON: I think it's fair to say that the expectations are fairly low, from this meeting. We've been led to believe, by Saudi Arabia and the other countries in the Arab Gulf that they don't really want to change their production policy. Saudi Arabia has made it clear for months that it isn't prepared alone to cut the production, in a bid to top up prices, which is a role, perhaps in the past, they would have been more willing to take on, so the expectation is that they will let the market stabilise itself. That was one of the quotes from earlier this week, and I think the expectation is OPEC is unlikely to cut production. That doesn't mean they are going to allow 'free for all' but I think it was very telling what the Iraqi Oil Minister said today.

He was saying that he thinks that there may be a floor, the Iraqi Oil Minister, Adel Abdul-Mehdi, said he thought there would be a floor between $65.00 and $70.00 a barrel. Well, that's below where we are now and the market is certainly responding. We've just gone down, in fact, to $77.50 a barrel, for Brent. That's an awfully long way. That's a 50 months; that's more than a 50 months low and there's no sign that this is going to be halted any time soon.

GUGULETHU MFUPHI: Christopher, are we on the brink of a new era, as we anticipate more shale and alternative oil technologies, to come to the fore, more significantly now?

CHRISTOPHER JOHNSON: Well, we've been in a new era for a long time because this new technology is really changing the way oil is produced. I think it's the media who are always very happy to talk about new eras. I suspect that we're seeing the same, sort of markets we've seen. Forever markets go up; they go down again. This is clearly a down period. Of course, what will happen though, if prices come down very much further than a number of the producers getting oil from shale resources, will stop producing. That will stabilise prices and, eventually they'll go up again.

I mean it is possible that that is, of course, what Saudi Arabia wants. I have to say, I don't hold with the conspiracy theories saying that producers are conspiring to drive down prices, to damage other countries, such as Russia. This is a rumour that has been moving around, certainly some of the Moscow newspapers have been repeating it, and I don't believe that. I think that, essentially, this is the way markets work. They overshoot and the moment they're overshooting to the downside and, perhaps, they've got a lot further to go but none of us have a crystal ball.

ALEC HOGG: Thanks to Christopher Johnson, who is the Energy Community Editor at Thomson Reuters.