On Monday, December 7 oil prices were heading towards their seven-year lows, as traders were pricing in OPEC’s decisions from the intense seven-hour meeting last Friday. Brent crude, which is traditionally treated as a benchmark, dropped 5% and got closer to $40 a barrel, its lowest value in 7 years. Smashing the market’s expectations, the block had decided to discontinue output target setting. After the initial information leak suggesting that the new output target was increased by 1.5M barrels per day (bpd) to 31.5M bpd, it was reported that OPEC had decided to abandon the target-setting practice altogether. Whilst most analysts were caught off guard by such a move, some are saying that OPEC had already been producing at the level close to that figure for months before the meeting. Dropping output-targeting is widely treated as a sign that OPEC members are not about to cut production any time soon.
For oil analysts all across the world, the move was a clear indication of Saudi Arabia’s determination to win over a larger part of the market from its more “expensive” counterparts. Many were looking for a decrease in the target output as Saudi Arabia and other OPEC members are taking the hit of low oil prices. However, with Iran back into play starting next year when sanctions are lifted, Saudis will likely try to pump even more to retain their dominant market share within the bloc. Meanwhile, Teheran promises to supply as much as 1M bpd starting in early 2016. Indonesia has also announced its reunion with OPEC, after a seven-year period of inactivity. With its 0.85 million bpd output, Indonesia is likely to add up to tensions already hovering over Saudi Arabia’s output decisions, potentially deteriorating the crisis of overproduction.
With inventories across the world swelling, it might be harder to keep selling more and more oil in 2016 even despite the growing demand. The oil glut (abundance, oversupply), which according to many experts has already formed, might become particularly acute if American shale drillers and Russian producers push forward with surprising resilience shown during the past year.