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Is OPEC’s Credibility Crumbling With The Price Of Oil?

Is OPEC’s Credibility Crumbling With The Price Of Oil?

As a founding member, and one of the world’s top ten producers of oil in terms of volume, Iran holds an influential seat at the OPEC group’s meetings. The problem for other struggling oil producing nations is that they didn’t actually attend this one. Iran’s stance on rejecting to halt production is worrying for those that profit from high oil prices, but their inclination to do so has some basis depending on the perspective it is viewed from.

Since 1979, the United States has imposed sanctions on Iran, notably in disagreement with their Iranian Enrichment Program in 2006. These sanctions heavily targeted Iran’s Oil and Gas sector, a major contributor to the country’s economy. Since the United Nations Security Council Resolution 2231 was passed in July 2015 and set out a schedule for eventually lifting UN sanctions, markets have anticipated widespread volatility in commodity prices and currencies. We have indeed seen these anticipations materialise with ‘fuel added to the fire.’ The price of oil is only partially recovering from a near 70% drop from its position in 2014, since Q1 2015 the USD Index has been trading in the highest range recorded (between 94-100), and emerging market demand has slumped along with the widespread effects of China’s slowdown. Yes indeed, oil has previously traded lower than the December low of $27 per barrel, at $23 per barrel in 2003, but that was during a period of increased Chinese consumption. Now, the global economic fundamentals are shifting as China, still a vast economy slows down from its period of hyper-growth, and new countries such as India are anticipated to play a more prominent role in the future of the global economy. These situations force you to ask, in such uncertain times, why would Iran want to sanction themselves by capping oil production at the beginning of such a prime opportunity for them to kick-start their oil exporting program?

The event of Iran choosing not to attend OPEC’s attempt at deal-making comes at a nervous time for producers that were hoping for a favorable deal. A successful deal would have helped communicate that recent improvements in the price of oil would continue. Nevertheless, from the other side, Iran is enjoying economic growth with increasing exports in oil and its derivatives. This week, twenty thousand oil workers go on strike in Kuwait due to dropping levels of their pay. Had they continued work, as usual, then the price of oil could well have dipped back below $40. Despite tanking prices and overkill in global supplies, OPEC members had previously increased production levels as disagreement grew about deciding on potential solutions. In essence, instead of solving the problem they faced, they made it more prominent by further over-production. Geographically, OPEC is far-reaching; its political reach extends throughout Algeria, Angola, Ecuador, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates and Venezuela. Perhaps it is time OPEC members explore a new approach to deal making; not just what is in it for me, but what is in it for everyone else?

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