Energy and Environment, Future of Energy
Amir Bagherpour | Feb 2016

OPEC in 2016

Updated: Nov 30
  • UPDATED: Nov 30

    After Multiple Failures on Reaching Agreement OPEC Finally Closes Deal on Output Cut

  • UPDATED: Oct 31

    OPEC Fails Again to Coordinate Oil Supply Cuts

  • UPDATED: Jun 02

    OPEC Fails Again on Reaching Agreement on Oil Production Ceiling

  • UPDATED: Apr 17

    Accurately Predicted: OPEC Fails to Reach Agreement on Production Freeze at Meeting

  • UPDATED: Apr 03

    Accurately Predicted: Oil Prices Drop as OPEC Members Increase Output

  • PUBLISHED: Feb 18

    OPEC in 2016

    What will Saudi Arabia and OPEC do in 2016?

    The decline of oil prices from $115 per barrel in 2014 to approximately $30 today has generated fiscal shortfalls for petroleum-producing nations. Saudi Arabia, the largest oil producer within the Organization of Petroleum Exporting Countries (OPEC), must decide whether to limit production or continue current levels to maintain market share. Their decision will have significant impact on producer and consumer economies worldwide.

    Our analysis shows that in 2016 OPEC is likely to maintain the status quo.

    Download the full report here.

After Multiple Failures on Reaching Agreement OPEC Finally Closes Deal on Output Cut

OPEC has reached a deal to coordinate a cut in overall petroleum production. According to the latest news reports the cartel  has agreed to cut production by around 4.5% at about 1.2 million barrels per day. In February of 2016 giStrat forecasted OPEC would fail in reaching agreement in their April meeting. As predicted OPEC countries  failed in reaching a an agreement on output reductions for several rounds of meetings following the April failure. We still assess that OPEC members might cheat on meeting their production cut requirements given their strong incentive to do so. However, the overall agreement will give a bump in oil prices.  As a result of this news Brent crude futures have jumped 8 percent to more than $50 a barrel. As part of the deal, Saudi Arabia has agreed to reduce half a million barrels per day (bpd) while Iran will continue to produce until they reach level consistent with pre-sanctions production.

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Predicting the Behavior of Saudi Arabia and OPEC in 2016

The decline of oil prices from $115 per barrel in 2014 to approximately $30 today has generated fiscal shortfalls for petroleum-producing nations. Saudi Arabia, the largest oil producer within the Organization of Petroleum Exporting Countries (OPEC), must decide whether to limit production or continue current levels to maintain market share. Their decision will have significant impact on producer and consumer economies worldwide.

Our analysis shows that in 2016 OPEC is likely to maintain the status quo.

Download the full report here.

  • Saudi Arabia will continue status-quo production levels to maintain market share (93% likelihood).
  • OPEC members will not reach an agreement to restrict supply. They will continue to produce at uncoordinated levels with little deference toward the current price of oil.
  • OPEC members will fail to coordinate pricing through quotas. OPEC members will divide into two camps as Gulf Arab countries attempt to retain market share at the expense of other member producers (Iran, Venezuela, Nigeria, Libya) who seek quotas to drive up the price of oil.
  • Iran will add to the global oil supply as sanctions are eased. This will bring a diminished return on oil sales than would have been expected because of current low prices.
  • Barring a significant external shock, the price of oil will remain at historical lows for the next six to twelve months, with continued pressure on marginal producers, including the U.S. shale market and petro-states Russia and Venezuela.

Conclusion

The price of oil will likely remain at historical lows the next six to twelve months, implying continued pressure on marginal producers such as U.S. shale market and petro-states such as Russia and Venezuela. With additional global supply expected in the coming year and continued “business as usual” at OPEC, we expect global crude oil benchmarks to remain within recent price boundaries throughout the course of 2016, barring a significant external shock.

Methodology

Game Theory Impact Model

giStrat estimated the game theory-based benefits (payoffs) of various OPEC member and non-member states by ranking their known preferences on two issues: (1) market share; and (2) price of oil. giStrat then calculated the range of combinations for these determinants to estimate how these members and non-members would act in 2016 regarding production levels and potential coordination of quotas.

Senturion Agent-Based Model

This forecast is conducted using a validated agent-based game theory model called Senturion. It incorporates computational analytics applying proven theories of behavior from the fields of psychology, political science, and microeconomics to anticipate political outcomes. In 2014 the State Department selected Senturion as the most accurate model for predicting conflict and crisis outcomes at 90% accuracy level across 200+ cases. Applying an agent-based game-theoretic approach to understanding the dynamics of OPEC member behavior, giStrat modeled OPEC bargaining amongst stakeholders over the next six to twelve months using Senturion simulation to assess the likely outcomes. In modeling stakeholder preferences, the simulation assumed that a nation’s bargaining range is a function of its position, salience, and relative influence on a given issue.

Modeling Current Member and Non-Member Positions

States ability to influence each other was operationalized quantitatively through a formula that accounted for its proven reserves weighted by its production levels. The stated position a nation held on the issue of OPEC quotas and productions was based on statements over the past twelve months and quantified using each member’s expected fiscal breakeven price of oil for 2016. The salience a state places on the issue was derived by operationalizing oil rents as a percentage of GDP weighed against the absolute deviation of fiscal breakeven price from the current price of oil. Discounts were then applied based on additional criteria (i.e. Iran was granted a positive discount as potential oil rents were not fully accounted for given economic sanctions). The values of non-OPEC members were derived from assumptions based on a qualitative assessment of geopolitical and economic factors.

Contributors

Amir Bagherpour, PhD, Chief Political Scientist
Shaun Donaldson, Senior Analyst

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