Is the ground ready for OPEC convergence?

Known to cause divides between regional powers, oil seems to be finally leading to unexpected convergence. The OPEC, which speculators thought wouldn’t last much longer after a weak run last year, is making a strong comeback with narrowing gaps between its members over the past few months.

In a post nuclear agreement world, Iran has seen its oil embargo lifted and is putting in effort to take back its lost market share. Some analysts expect this to cause rift between Tehran and the Gulf countries.

The rise in US crude oil production was a primary factor in the recent collapse in global oil prices. US oil production has gone up from five to nine million barrels a day over the past five years. Hence, reducing US crude oil imports is an important factor for OPEC.

Since Iran was absent from the market due to sanctions, Saudi Arabia took a leadership role and maintained the output. Subsequently, the price of each barrel of oil went below $25, which made it expensive for American oil producers to compete.

The sanctions on Iran and the unprecedented events in Libya took nearly three million barrels a day off the global market. This number eventually was matched nearly barrel for barrel by an increase in US production. At the time, before the sanctions on Iran, the oil price was around $125 a barrel.

This common ground unifies OPEC members to pursue an effective policy. Now, most of the non-OPEC oil producers are willing to meet OPEC members to sign up to market regulations as the cartel acts powerfully

Camelia Entekhabi-Fard

Role of OPEC

OPEC, which pumps about 40 percent of the world’s crude oil, was once considered one of the most powerful oil cartels with the power to regulate the oil market. But the revolution in Iran and all the regional disputes decreased its value and empowered the producers.

Over time, in the absence of Iran due to the sanctions, many of the supply concerns were resolved by Saudi Arabia. However, US oil production continued to rise, exceeding expectations over the last four years. Prices began to fall in the summer of 2015 due to this increase as well as an unexpected return in Libyan production and a slowdown in economic growth.

Unlike in 1986, when OPEC restricted output to boost prices, they did nothing last summer. There was a view that Saudi Arabia should not act alone to support prices and that cuts were also needed from other OPEC and non-OPEC producers, such as Russia and others.

Then there was a surprising development, in Algeria in September, when OPEC oil ministers agreed with the Saudi proposal to freeze output. Iran also accepted this proposal. All OPEC members agreed – on Sept. 28 in Algiers – to limit production to a range of 32.5 to 33 million barrels a day in a bid to reduce a supply that sent prices to a 12-year low earlier this year.

Not so confident about the presence of Western powers in the region and the future of the conflicts, OPEC players in the region may look to put their differences aside. It’s interesting to say that oil can used as a tool to end regional conflicts due to mutual interest.

US shale production is quick as you drill new wells that do not require a ten-year, multibillion dollar investment. This feature of US shale production, which goes offline and online very fast, is a threat to regional producers.

This common ground unifies OPEC members to pursue an effective policy. Now, most of the non-OPEC oil producers are willing to meet OPEC members to sign up to market regulations as the cartel acts powerfully.

Russia is expected to participate in technical talks with OPEC members in Vienna on Oct. 29. The group will have its next ministerial meeting within a month on November 30 in Vienna, a gathering which some of the US producer companies are willing to send members to.
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Camelia Entekhabi-Fard is a journalist, news commentator and writer who grew up during the Iranian Revolution and wrote for leading reformist newspapers. She is also the author of Camelia: Save Yourself by Telling the Truth - A Memoir of Iran. She lives in New York City and Dubai. She can be found on Twitter: @CameliaFard
 

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