A Line in the Sand: OPEC Divided Amid Threat of Low Oil Prices in 2016

At its Vienna summit, the Organization of Petroleum Exporting Countries (OPEC) announced that it would maintain present production levels despite lower prices but remains divided over its production ceiling; meanwhile, some of its poorer member states face economic chaos.

OPEC's decision underscored that the group valued the preservation of its market share more than its ability to keep oil prices from falling, according to the Wall Street Journal.  The group was divided over its production ceiling as its member countries weren't able to reach an agreement.

Currently, production stands at 31.5 million barrels per day (bpd), while its target output is 30 million bpd.

This stance could cost some OPEC countries dearly amid continuously decreasing oil prices, according to Helima Croft, RBC Capital Markets global head of commodity strategy Helima Croft.

"The current OPEC strategy — or non-strategy — leaves a significant portion of the cartel at risk for a significant crisis in 2016," Business Insider quoted Croft as saying.

Moreover, this meeting exposed the "vast divide between OPEC members," as no significant steps for relieving contradictions between two key groups within the cartel had been made, she pointed out.

"The interests of member countries have perhaps never been so far apart," Croft wrote ahead of the meeting.

One OPEC faction consists of the so-called "fragile five": Libya, Iraq, Nigeria, Algeria, and Venezuela, which are believed to be most vulnerable to oil price volatility. Under a scenario in which oil would become cheaper, economic and political collapses for those states would be imminent, according to Croft.

The second group contains more stable countries, which participate in the Gulf Cooperation Council (GCC): Saudi Arabia, Qatar, Kuwait, and the UAE; these high-income Arabian countries would be able to weather a lower price environment.

Croft also highlighted that under the set conditions, Iran would eventually team up with the OPEC members. If sanctions against the country are lifted, Tehran stands to reap significant economic benefits.

"[Iran's] refusal to abide by any output restrictions likely contributed to the lack of any real decision from the cartel," Croft pointed out.

According to Business Insider, the rift in OPEC  may eventually affect the rivalry between Iran and Saudi Arabia, which are vying for regional hegemony. Reserve oil output and sanctions relief would play into the hands of Tehran, which could easily gain the upper hand in that case over Riyadh, which has been dealing with budget pressures and reported divisions among its elite.

 

So far, the Washington Post projects that the oil market will remain oversupplied in 2016, and that prices will be low. This could deepen the "divide within the cartel, and that could mean pain for some of its members going in the upcoming year" Business Insider concluded.