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No cuts in oil production expected

Saudi Arabia is intent on maintaining oil production.
[additional-authors]
June 4, 2015

This article originally appeared on The Media Line.

When the OPEC oil producing countries meet this week in Vienna, they are not expected to back away from their risky strategy of keeping oil production high despite low prices. Oil prices have stabilized at just over $65 a barrel, about $20 higher than their lowest price in January, but far from the high $100 that oil producers would like to see.

“In the past, the Gulf countries, especially Saudi Arabia, have been swing producers, meaning that when oil prices are low, they try to balance the market by cutting production,” Jason Tuvey, a Middle East economist at Capital Economics in London told The Media Line. “But now they say they’ve turned around and say they won’t cut production. They are willing to tolerate a period of low prices because they are not willing to cede market share at this time.”

OPEC is currently producing about 31 million barrels per day, one million more than their announced ceiling of production. OPEC Gulf delegates said they do not expect any major changes.

“Everything is very clear,” OPEC Secretary-General Abdullah al-Badri said in advance of Friday’s meeting. He added that he expected it to be a short meeting.

At their last meeting in November, 2014, Venezuela and other countries tried to convince Saudi Arabia and its Gulf allies to cut down on supply as a way of pushing prices up.

“Over the past decade the Saudis stashed a lot of revenue away,” Tuvey said. “Now they are drawing down on those funds to keep the economy ticking along.”

The decision not to do this shows that Saudi Arabia, the OPEC cartel’s most powerful member, will stand up to rivals like Iran and Russia. If Iran and the international community agree on a deal on Iran’s nuclear program, then it could increase its production. Iran’s oil minister said he expected that other countries would make room for Iran to produce more.

The political rivalry between Iran and Saudi Arabia may make that unlikely, however. The two countries are currently locked in a proxy war in Yemen, with Iran supporting the Houthis, who have overrun large parts of the country, and Saudi Arabia bombing the Houthis is support of Yemen’s deposed president.

Instability in the Middle East could also lead to disruptions in production. For the past two years, Libya has been unable to produce oil.

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