OPEC set to disappoint oilpatch

Alberta's oilpatch shouldn't hold its breath for higher oil prices as OPEC will likely avoid any production cuts when member countries gather for the first time in six months on Friday to discuss the international oil market.

Experts seem unanimous in expecting the cartel to maintain the status quo, despite nearly one year of low global oil prices. However, that doesn't mean OPEC won't take action in the near future.

The cartel is thought to want current prices to continue, as it allows members to gain market share by edging out high-cost competitors around the world

"My guess is that it is very unlikely they will announce any cuts," said Paul Stevens, a research associate at Oxford University and an international consultant for industry and government. "They see at the moment, rightfully or wrongly, that the strategy seems to be working, largely because a lot of people are talking about U.S. tight oil declining. It is not (declining), but people are saying this."  

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American tight oil is believed to be a threat to OPEC because of rapid supply growth in recent years. Many believe that growth is the reason behind last summer's price crash.

Most analysts would be surprised if the cartel announces any changes. That's why, despite the upcoming OPEC meeting, Wood Mackenzie is maintaining its oil price forecast for Brent crude to average $60 this year and about $70 per barrel for 2016.

The cartel has maintained its production quota for several years, although its actual output has exceeded the quota for much of the last year. In fact, since the last OPEC meeting on Nov. 27, member countries have overproduced beyond the stated quota by an average of 573,000 barrels of oil per day, according to Calgary-based Altacorp Capital.

"If they did decide to cut, who would believe them? They have no credibility left. It wouldn't have much of an impact on the markets, or at least it shouldn't," said Stevens, suggesting OPEC's relevance has diminished.

Besides trying to knock back competitors, other factors may be at play, including the reputation of OPEC. One priority for the Saudis is to project strength in the Middle East, according to Meghan O'Sullivan, a Harvard University professor.

Having lived in the Arab world, she kept hearing people talk about the need for the Saudis to appear powerful. While she at first dismissed the notion as too simplistic, she quickly learned it was true.

"In a very volatile regional environment, where Saudi Arabia sees a lot of existential threats to its interests, projecting strength is very important," said O'Sullivan. "So cutting back oil production, potentially with the result of not seeing the change in price, I don't see Saudi Arabia to do that soon."

However, she believes OPEC will have to cut oil output at some point in time. In particular, Saudi Arabia might cut production if it is able to cajole Russia and Mexico to take similar action.

"I don't expect anything to bear fruit in the near term," said O'Sullivan.

However, as a lavish welfare state, she said the Saudis can't continue with these prices in the long term.