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OPEC gulf producers look to stay the course for now

A global over-supply of crude oil has sent the price for the commodity down to historic lows since June of 2014, when the prices for Brent and WTI crude were above $115 and $107 per barrel, respectively. Much of the decline in the prices came following the decision from OPEC to shrug off its traditional role as swing producer, instead opting to defend the organization’s global market share by continuing to produce at record rates.

The move has hurt producers worldwide, including those in OPEC, with Saudi Arabia, the group’s largest producer, likely to post a deficit of 19.5% of GDP this year, according to information from the International Monetary Fund. Members like Venezuela, a country that relies on oil for 95% of export earnings and 25% of GDP, have even called on OPEC for a meeting to establish a floor for oil prices, signaling that not every member of the oil-producing cartel feels the current strategy is in its best interest.

Saudi Arabia, Iraq, Iran, Qatar, the U.A.E. and Kuwait, OPEC’s Gulf producers, have largely been the source of the group’s increased output since the middle of last year, with sources inside the group saying they do not plan to call a meeting in order to cut output for fear that the market might backlash if no positive outcome occurs.

“The problem is that there is no commitment from the countries outside OPEC on what they would offer for the stability of prices,” said Ali al-Omair, Kuwait’s oil minister. “Their request from the OPEC members is to … reduce production while others continue pumping, and then we lose our market share.”

Kuwait could be the first oil producer to throw in the towel according to PRIX Index

Despite its statements that Kuwait does not see a reason to reduce production, analysts inside the country think that the gulf producer may be the first to lower its crude exports, based off information from the third-quarter release of the PRIX Index.

The PRIX Index is published once quarterly, and takes input from analysts inside the world’s 20 largest oil-exporting countries to quantify the effect of political developments on oil exports. The index range is 0-100, where 0 represents a maximum reduction in oil exports, 100 represents a maximum increase in exports, and 50 represents no change.

Source: PRIX

While the overall PRIX index value for the fourth quarter of 2015 is 52.92, representing a slight increase in global oil exports, Kuwait experts indicated that the country is likely to reduce its exports through the remainder of the year.

“The change in Kuwait’s index number is particularly interesting,” said the PRIX report. “Kuwait has consistently had a neutral index value in the past three index updates, but has now made an abrupt shift towards a very low index value of 28.57,” indicating that the country is likely to reduce its oil exports even as OPEC remains set on producing well above its self-imposed quota of 30 MMBOPD.

The move is somewhat surprising given that Kuwait has three times more reserves per capita than Saudi Arabia, even as OPEC’s largest producer continues to spearhead the group’s market strategy, according to Khalid Alsweilem, former official at the Saudi central bank and now at Harvard University. 60% of Kuwait’s GDP, and 95% of its export revenues come from oil, according to OPEC.

The PRIX Index also looks at the disagreement between county analysts to form an idea of how predictable the move in export numbers will be. The Kuwait analysts showed the most agreement on how the country’s exports would look throughout the rest of the year, making their call for lower oil exports the most “predictable” among those in the report.

Source: PRIX

Source: PRIX

Other highlights from the PRIX Index

  • The PRIX index value for Q4 2015 is 52.92, indicating that global oil exports may rise only slightly during the coming months, helping keep the oil price weak but stable.
  • Iran, Iraq, and Oman are expected to contribute most to rising supplies.
  • Iran’s index value is highest of all, and the PRIX country analysts are confident that Iran will rapidly raise exports by the end of the year.
  • Taking into account the index values from the past three quarters, the longer-term trend is towards stabilization of oil exports and a new oil market equilibrium for the time being.
  • There was increased divergence among the views of PRIX index country analysts compared to the previous quarter, possibly indicating that more countries are nearing a change of export strategy.

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