Group therapy Source: TheAustralian
DISCORD at OPEC is turning into a price war, loosening the cartel’s grip on the oil market and exacerbating a recent steep sell-off.
Fissures have widened as Mideast turmoil frays political alliances and producers vie for customers amid a flood of oil from the US and slowing growth in Asia. “No one is telling anyone what they are up to,” one Gulf oil official said.
Saudi Arabia this week unilaterally lowered the price it charges for crude scheduled for delivery next month – without the typical consultation with other members of the Organisation of the Petroleum Exporting Countries, according to OPEC officials. The decision surprised many market watchers, who were expecting the Saudis to cut output to help boost prices, and sent prices hurtling lower.
Brent, the global oil benchmark, slid 1.2 per cent on Friday to $US92.31, the lowest price since June 2012. Prices have tumbled 20 per cent from their mid-June high.
The US benchmark, West Texas Intermediate, settled down 1.4 per cent on Friday at $US89.74, the lowest settlement since April 2013. US prices have fallen 16 per cent from their mid-June high.
The Saudi decision followed a similar move by the kingdom and Kuwait to lower prices for delivery this month, without informing other OPEC members, according to OPEC officials, effectively undercutting fellow members.
“If members don’t co-operate, which is likely, everyone is in trouble and prices will drop even further,” said another OPEC official from a Persian Gulf state.
Since its founding in 1960, OPEC has been rife with infighting among member states, which decide behind closed doors when to cut or boost their collective output to try to influence prices. But in recent months, divisions have deepened significantly, according to OPEC officials and analysts. That has weakened the group’s influence at a time when it is confronting some of the biggest challenges it has ever faced.
Recent turmoil across the Middle East has scrambled long-held political alliances among some of the group’s most important members. The US shale-oil boom is robbing OPEC of one of its best customers and contributing to a glut of non-OPEC oil sloshing into world markets. And breakneck economic growth in Asia, which buoyed oil prices amid downturns in the US and Europe, is slowing.
All of this has helped drive global prices sharply lower. In the past, OPEC has typically moved collectively in such situations to boost prices, either slashing output or threatening to do so. Many inside and outside the organisation doubt whether the group can do much amid its current disarray. The drop in prices is particularly worrying for OPEC producers in Latin America and Africa that depend on oil revenue to support high spending, as well as Iran, where trade is crimped by international sanctions.
The OPEC disunity also threatens a global safety net. OPEC members, which pump more than a third of the world’s daily supply, have acted in the past to keep a lid on prices amid big supply disruptions, as they did ahead of the US-led invasion of Iraq in 2003.
OPEC members are sitting on unused pumping capacity of about 3.8 million barrels a day, equivalent to 4 per cent of global oil supplies, according to the International Energy Agency – spare capacity that could generally be called upon quickly in a pinch.
As the boom in US oil production has curbed American fuel imports, OPEC members have relied more on customers in Asia. But with growth in Asia’s economies and oil demand levelling off, OPEC members have started competing against each other for market share, often leading to price competition.
Last month, Saudi Arabia and Kuwait both cut their October prices for Asian buyers, effectively undercutting the UAE, a Persian Gulf neighbour and fellow OPEC member. In the past, such cuts would have been taken collectively among Arab Gulf OPEC members.