|Photograph: Sergei Karpukhin/Reuters|
The much awaited meeting of Sunday 17th April 2016 came and went by with poor results.
The negotiations buckled after Saudi Arabia surprised the group by reiterating its demand that Iran also agree to cap its oil production.
Oil prices had risen in the weeks prior to the meeting on speculation that Saudi Arabia might successfully lead an initiative between members of the Organization of the Petroleum Exporting Countries and Russia, which joined the talks.
Following the meeting, U.S. crude plunged to $37.70 a barrel and Brent dropped to $40.14 a barrel in early Asian trading.
The collapse of the meeting brought on a disappointment on those who had laid their hopes on a positive outcome. On a larger scale, many analysts felt that the outcome would only produce dismal results in the long term as it would take a while to clear the oversupply. Furthermore, as the reality of low prices begins to set in (many cash-strapped producers are being pushed out of business), the outcome of the oil freeze deal becomes less important.
Mr. Torbjorn Kjus, an oil market analyst at Norway’s DNB Bank ASA believes that prices could potentially fall back to $25 a barrel if no freeze deal is struck.
Iran, (a key factor in the output freeze deal collapse) have remained adamant that it will not support the freeze deal and intended to increase production to 4 million barrels a day, from 3.1 million barrels. Oil Market observers believe such an increase would take years.
On the other hand Saudi Arabia’s low-cost output gives it a major competitive advantage over other producers around the world. The kingdom increasingly must feed its own growing fleet of refineries in Saudi Arabia and Asia while trying to maintain its share of global crude trade.“They’re starting to see that a less-risky strategy is just getting their oil out of the ground sooner than later,” said Jim Krane, a fellow at Rice University’s Baker Institute for Public Policy.
However on a global scale, new and potential entrants such as Kenya, Uganda, Tanzania, Mozambique and Ghana will get to suffer the consequences of the oil glut. Such consequences include, delayed final investment decisions (FID) by investors into their new-found resources, postponed production dates, and if production occurs, marginal returns considering that the quality of Kenya’s and Uganda’s crude is not the best. Even if the price rebounds to $80 which is considered by most producers to be the most economically viable amount to produce oil, the chances of commanding even the low international price of US$60 per barrel are slim. Kenya and Uganda could earn between US$40 and 50 per barrel, which would be uneconomical, although earlier on in the year Tullow stated that Kenya’s oil could be produced with $25 a barrel.
However, all is not doom and gloom as these countries now have the opportunity to lay down their infrastructure as well as prepare the locals with the relevant technical expertise in readiness for production in the near future.