Why won’t oil producers cut supply to boost the price?

Oil prices have collapsed to below $28 a barrel, their lowest since 2003, on a supply glut that may worsen this year with the lifting of sanctions on Iran.

The oil market is at risk of going into freefall if there is no production cut by Saudi Arabia at the June meeting of The Organization of the Petroleum Exporting Countries (OPEC), says Commonwealth Bank’s Executive Director of Energy Research, Aiden Bradley.

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The South American country, once of the continent’s wealthiest, derives approximately 96% of its government revenues from oil exports.

“Lower oil prices strain the fiscal positions of fuel exporters and weigh on their growth prospects”, the report read. Worldwide sanctions, including those on its oil sector, were lifted on January 16 as Iran met the terms of an agreement to curb its nuclear development program.

While supplies outside OPEC proved “resilient” for most of last year, they shrank on an annual basis in December for the first time in three years, according to the IEA.

It adds that the decline in maintenance capex “should also start to show through higher decline rates and possibly greater supply outages; places like Canada, the North Sea, Latin America, and parts of Asia are particularly vulnerable, with all projects in Canada now below cash cost”.

Morgan Stanley warned last week that further devaluation of the Chinese yuan could bring oil prices spiraling down to between US$20 and $25 per barrel. Russian Finance Minister Anton Siluanov has said that the country’s budget would only be balanced with crude at $82 per barrel, well above the $50 per barrel that the government used to calculate its budget for 2016.

Crude oil seems to be trading on its own whims. All countries are announcing investment cuts and firing workers. Oil revenues are expected to reach $118 billion, a decline of 23 percent from the previous year.

The Venezuelan minister said it was necessary to coordinate the actions to restore stability on the global hydrocarbons market.

Saudi Arabia’s fiscal consolidation has been more ambitious and speedier “than what had been anticipated earlier, and one of the consequences will be to see dampening effect on non-oil growth”, the IMF’s Middle East chief Masood Ahmed said in a phone interview. He specializes in UNR-ROFEX finance, and holds a masters degree in energy planning from UFRJ, and a PhD in economics from the Catholic University of Argentina.