DUBAI/LONDON: Some of OPEC’s Gulf members are concerned about the latest drop in oil prices which had not been expected, OPEC delegates said, but they see little chance of the exporting group diverting from its policy of defending market share.
Brent oil is trading near $46 a barrel, close to its 2015 low after an 18 percent drop in July, pressured by abundant supplies and concern about the health of the Chinese economy, the world’s second-largest oil consumer.
Despite this, the delegates including from Gulf OPEC members who declined to be identified say China is still buying and stockpiling crude and they expect strong global demand growth should push prices back to $60 next year.
“There is a concern about the health of the Chinese economy, but as numbers have shown the need to import oil is increasing,” said an OPEC delegate from a Gulf oil producing state.
“Oil prices will remain volatile ... but they will recover,” the delegate said this month, adding that he does not expect OPEC to take any step now “due to unclarity” in the market.
Prices have more than halved since June last year.
OPEC’s Gulf members, relatively wealthy, are better able to cope with low oil prices than the African members, Iran or Venezuela. Led by Saudi Arabia, the Gulf members drove OPEC’s strategy shift last year to allow prices to fall to discourage growth in competing supply sources.
While non-Gulf members of the Organization of Petroleum Exporting Countries have frequently expressed concern since then about the drop in prices, Gulf members have rarely voiced such sentiments. But there is no indication that they expect OPEC’s policy to change.
“Of course everyone is concerned, but we hope by the fourth quarter the market will start recovering,” a second OPEC source said, citing the end of seasonal refinery maintenance that will boost crude demand.
OPEC officials reconfirmed its market-share strategy at its last meeting in June. At the time, delegates were expecting a recovery in prices toward the end of 2015, supported by expected higher global demand.
But those sentiments have changed with the latest oil price drop and as concern grows about the demand outlook in China.
“Prices are expected to stay under downward pressure until the expected enhancement in demand next year, then they can reach around $55-60 a barrel,” a third OPEC delegate said.
OPEC currently expects an acceleration of growth in world oil demand next year to 1.34 million barrels per day, from 1.28 million bpd this year, as well as an increase in the demand for its own crude as non-OPEC supply expansion slows.
Although China’s demand for crude has so far remained strong as authorities take advantage of cheap oil to build up strategic reserves and consumers kept spending despite the slowing economy, there are signs of weakening, with the devaluation of the yuan potentially denting fuel imports.
OPEC delegates and industry sources say it is hard for Saudi Arabia to reverse the policy it championed, particularly at a time when both Iran and Iraq are gearing up to boost their crude exports.
“The Gulf states are worried about the decline but there will be no change of direction unless Saudi [Arabia] was to lead it,” an industry source and OPEC expert said. “At the moment, Saudi is still in charge and they will stick with it.”
Adding to the uncertainty over the health of the Chinese economy is concern about rising global oil production in a market that OPEC’s own forecasts indicate is already oversupplied by more than 2 million bpd.
Saudi Arabia and Iraq, OPEC’s top two producers, have been pumping this year at record highs, and others like Russia have kept production levels elevated.
OPEC does not meet until Dec. 4 and has rebuffed calls for an emergency meeting by Algeria. While OPEC rules say a simple majority of the 12 OPEC members is needed to call an emergency meeting, insiders say unless Saudi Arabia is among those in favor no meeting is likely.
“Emergency meetings need coordination and agreement or at least a proposal before the ministers go for it, and I don’t see this happening,” the second OPEC source said.