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OPEC in dilemma of market share, crude prices

Recent oil market developments could justify presence of shale oil as an alarm for OPEC members though what decision to take is yet open to debate.

OPEC in dilemma of market share, crude prices
(Saturday, April 8, 2017) 10:08

It was last week that Reuters reported on the agreement reached by the joint ministerial committee comprising members of the 13-nation oil cartel to extend the production cut deal for another six months. While the first draft of the deal argued that a high level of commitment to the deal was required, in its final version, the committee has demanded OPEC Secretariat to review market conditions and submit a report in April 2017 on extension of voluntary output cuts. The reason for such action goes back to the rise in oil reserves of the US on the basis of recent reports. According to statistics, America’s oil supply reached the unprecedented level of 528.4 million barrel in the week leading to March 10. The same issue affected the OPEC basket whose prices dropped to their lowest rate so far in the new Christian calendar year of 2017. As such, the average price of OPEC oil in the week ended on March 24, 2017, stood at 48.76 dollars per barrel, while the average price of oil at the beginning of 2017 had revolved around $52.23. These developments could justify presence of shale oil which marks a warning for OPEC; now, the decision which oil producers need to take in order to manage the market and crude prices remains open to debate and puts OPEC members in a great dilemma.

On the proper decision to be adopted in view of current situations, Javad Yarjani, a former Iranian OPEC official, while stressing that OPEC members have to choose between market share and crude prices, said “all oil-producing countries hold concerns about global crude prices and it can be boldly claimed that high oil prices over past few years, which were caused by sanctions against Iran and political events in Libya, landed the strongest blow on the oil market since they marginalized maim factors determining crude prices while political issues began to dominate the market.”

In November 2014, Saudi Arabia was able to push American shale oil out of the market by avoiding cuts in its output. It should be noted that with technological improvements, shale oil production costs have fallen and on the other hand, shale technology offers the possibility to begin oil production at any time. OPEC states therefore feel urged to reach an appropriate consensus on their policies in the oil market, the official added.

The international oil expert said the US had taken the first step in regulating its oil market adding OPEC owes many of its scheme to an institution through which American oil producers have become united.

Yarjani described Saudi Arabia as the most influential decision maker in OPEC for undertaking the largest portion of oil production cut in order to control the market. On the other hand, it should be noted that Saudis hold a different situation among all OPEC members because they pay high production costs and suffered the most damage from at the time of high oil prices.

Arabic Marketing

He referred to the recent visit of Saudi king to East Asian countries asserting “the most important consequence of the visit pertained to importance of oil as the highest-ranking official of the Arab country travelled to East Asian countries majority of whom are oil consumers. Most of the media described the visit of the Saudi king as a marketing measure for petroleum products which reveals particular importance of crude. Although prior to the Islamic Revolution, Iran was the first country to run 50-50 partnership in construction of a refinery project in Korea to diversify its oil consumption venues, the country was forced to sell its shares due to various problems. At this juncture, Saudi Arabia purchased 40 per cent of the share at the price of 500 million dollars.

Iran’s former representative at OPEC said what mattered to the 13-nation oil cartel was the production capacity rather than amount of oil reserves. On the other hand, it should be noted that capital is directed towards a position where relative peace and stability is found. Therefore, higher levels of consistency in oil industry policies are required if we want to attract foreign investment.

Tsarist trade

At another part of his remarks, Javad Yarjani deemed Russia as a major partner of Iran in the oil industry saying “volume of trade turnover between Tehran and Moscow stands at nearly one billion dollars which marks a low figure given than the two sides are neighbors and hold common interests. The exchanges in the field of Russian petroleum equipment and products in return for Iranian crude oil could prove effective in strengthening bilateral relations.”

He also pointed to capabilities of Gunvor Group which manly work under non-Russian (Finnish) corporates asserting “such successful experiences need to be exploited in order to strengthen the Iranian oil industry.”

“Gunvor Group  is one of five companies active in oil trade and its revenues sometimes surpass that of oil-producing countries. Nevertheless, the US has imposed sanctions against Gunvor under the pretext that the oil giant is affiliated with the Russian President Vladimir Putin,” he concluded.

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