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OPEC’s ‘victory’ against rivals comes at heavy price

Saudi Arabia's Minister of Petroleum and Mineral Resources Ali Ibrahim Naimi speaks to journalists at a hotel in Vienna, Austria, Tuesday, Dec. 1, 2015, prior to  the OPEC oil  ministers' meeting on Friday. A year after Saudi Arabia and its OPEC allies began waging a war against U.S. shale and other high-cost producers to grab market share, OPEC is gathering again to assess the damage they have wrought over the global energy industry.

So this is what winning looks like.

Jackie Forrest: Why the OPEC price war will rage on

ALEXANDER KLEIN/AFP/Getty Images
November 27th marks the one year anniversary since Saudi Arabia made the watershed decision to pivot from protecting oil price to maximizing market share. The members of the cartel will meet again, to ponder if they should stay the course on the decision made last year, or intervene in what is proving to be the greatest oil market downturn in decades.

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A year after Saudi Arabia and its OPEC allies began waging a war against U.S. shale and other high-cost producers to grab market share, the group is gathering again in Vienna to assess the damage they have wrought over the global energy industry.

While OPEC’s strategy of maintaining its quota of 30 million barrels per day has driven down prices and left global oil companies retreating from ambitious expansion plans, the group’s own members are also counting heavy losses with massive budget deficits and anemic economic growth.

“What does winning look like, who is this really working for?,” Helima Croft, chief commodities Strategist at RBC Capital Markets, said in an interview from Vienna, where the group began its two days of meetings on Thursday. “The Saudi deficit is 20 per cent of GDP, they have burnt through US$100 billion from their forex reserve, and now they are going to borrow from the international market. This is an amazing definition of victory.”

The drop in oil prices will shift the aggregate current account of Middle East oil exporters to a deficit of US$82 billion in 2015, from a surplus of US$233 billion in 2014. The Gulf states, that include OPEC members Saudi Arabia, UAE, Qatar and Kuwait, will see GDP growth of 3.1 per cent this year, compared to 3.6 per cent for their emerging market peers, according to the Institute of International Finance.

Over the past year, cash-strapped OPEC economies such as Iran and Venezuela have favoured an output cut to support crude oil prices – and their economies. But richer members Saudi Arabia, UAE and Kuwait have repeatedly rejected the idea.

The Saudis also find themselves in a bind: If they agree on a production cut now, it would only strengthen their rivals, and the financial pain they endured over the past year will be for nought.

“It would not make sense for Saudis to back off from that policy and cut production in order to make room for Iran and secondly help U.S. and Russian producers,” says Ann-Louise Hittle, vice-president of macro oil at consultant Wood Mackenzie. “I can’t see why that would be an advantageous move.”

Despite calling for output cuts from the group, Iran is paradoxically poised to raise its own production by as much as one million barrels per day once Western sanctions are lifted next year.

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