Oil Producing Countries Ministerial Meeting: Background, Results, and Market Implications

Oil Producing Countries Ministerial Meeting: Background, Results, and Market Implications

On April 17, 2016, in Doha, Qatar, at least 15 oil producing countries—representing approximately 55% of global crude oil production—gathered for a meeting with the Organization of the Petroleum Exporting Countries (OPEC) to discuss an agreement among attendees to limit oil production to January 2016 levels in order to support prices. Countries represented at the meeting included most OPEC members as well as non-OPEC oil exporters, but not the United States. Producing country meetings/agreements have occurred in the past and are closely monitored by the media and oil market participants as an agreement, or lack thereof, could potentially affect crude oil prices. Due to the inability of the attendees to agree on the production limits, the Doha meeting ended without a formal agreement. As a result, oil prices are likely to remain relatively low until supply and demand fundamentals re-balance.

Oil Prices Motivate Action

The primary motivation for coordinating oil production limits is to provide support for crude oil prices. Following a period of relative price stability—$80 to $120 per barrel from 2010 to mid-2014—oil prices started to fall in mid-2014 and fell below $30 before recovering to near $40 as of mid-April 2016 (See Figure 1). Prolonged low oil prices—characterized as "untenable" by Qatar's energy minister—and the resulting fiscal challenges have motivated oil producing countries to consider taking actions that might either stabilize, or perhaps increase, prices.

Figure 1. Crude Oil Spot Prices

January 2010 to April 2016

Source: Energy Information Administration

Notes: WTI = West Texas Intermediate

Oversupply Results in Downward Price Pressure

While there are many factors (e.g., monetary policy, currency valuations, production decisions) that can affect crude oil prices, ultimately supply and demand fundamentals generally have the strongest influence on price. Globally, the liquid fuels market has been consistently oversupplied—production exceeding consumption—since the first quarter of 2014 (see Figure 2). Oversupply for the second quarter of 2015 reached 2.4 million barrels per day (MMb/d) and has since fallen to 1.7 MMb/d.

Figure 2. World Liquid Fuels Production and Consumption Balance

Source: Energy Information Administration, Short-Term Energy Outlook, April 2016.

The combination of weak economic growth, which limits oil demand growth, and high global oil supply growth is the primary contributor to the currently oversupplied oil market. The International Monetary Fund (IMF) has reported sluggish global economic recovery and growth prospects, which in turn impact the demand for liquid fuels. Regarding supply growth, several countries have increased production in recent years, including the United States, Saudi Arabia, Russia, and Iraq. In terms of production volume increase, the United States was the largest contributor to global supply growth, having increased by 4 MMbpd between 2010 and 2015 (See Figure 3).

Figure 3. Crude Oil Production: Selected Countries

2010-2015

Source: CRS with data from the International Energy Agency.

During the OPEC 166th meeting in November 2014, it was anticipated that the organization would agree that members should reduce production levels in order to stabilize crude oil prices, which had fallen by approximately 30% during the preceding five months. However, OPEC decided to maintain production levels—although this was not a consensus view among member countries—and essentially signaled to the market that OPEC would not adjust production to manage the market. In effect, the OPEC decision resulted in a market condition whereby oil prices would influence production instead of OPEC production decisions influencing prices. However, oil prices continued to fall and a group of OPEC and non-OPEC countries announced in February 2016 a framework for an oil production agreement that was to be formalized in April 2016.

Summary and Impacts of the Oil Producer Meeting

The design of the April 2016 oil production limit agreement was to have all parties to the agreement (OPEC members, Russia, and others) limit oil production to January 2016 levels. For large producers such as Saudi Arabia and Russia, January 2016 was a historically high production month. However, for OPEC members Iran and Libya, January was a relatively low production month as a result of sanctions in Iran and war recovery in Libya (see CRS Report IF10388). Iranian oil production—2.85 million bpd in 2015—was down by approximately 850,000 bpd from 2010 levels due to sanctions. As of January 2016 virtually all sanctions on Iran's energy sector had been lifted or suspended and Iran has stated its objective to return to pre-sanctions oil production levels. According to one source, Iranian crude oil production increased between January and March 2016 with volume estimates ranging from 30,000 to 347,000 bpd. While the proposed oil production limit agreement would have prevented the near-term addition of Iranian crude oil into an oversupplied oil market, in effect it would have meant a production cut for Iran. This was an unacceptable solution from Iran's perspective and one of the primary obstacles to codifying the agreement.

Indicators suggest that the oversupply situation is likely to be resolved by a combination of increasing oil demand (projections indicate that oil demand will increase by 1.2 million bpd in 2016 compared to 2015) and falling non-OPEC supply (U.S. crude oil production is projected to decline by 800,000 bpd in 2016 compared to 2015), at which point there is likely to be upward pressure on prices. All else being equal, these two factors alone may address most if not all of the existing oil oversupply. However, market uncertainties such as Iran's production ramp-up, Libya's return to pre-war levels, production volumes in Iraq, and global demand growth make forecasting a balanced market condition difficult. The International Energy Agency (IEA) projects the market to re-balance sometime around mid-2016 and the U.S. Energy Information Administration (EIA) is projecting sometime in 2017, perhaps as late as the second half (see Figure 2). Barring any unplanned production outage or geopolitical events that might impact production, oil prices may remain relatively low until the market tightens and global inventories start to decline.