Discord in OPEC

In the aftermath of the OPEC meeting last week, Oil has fallen to fresh 6 year lows, with Brent trading below $40 on Tuesday and WTI trading below $37.

This new low for Oil was due to inaction by OPEC, when they decided not to alter their output levels. There was initial volatility as reports came out that they have actually increased their output to 31.5 million barrels a day from the previous level of 30 million. However, this was not officially announced and may just reflect the fact that 31.5 million is closer to what OPEC has been producing even with the 30 million target. This lack of action was viewed as bearish for Oil, as the supply glut was not addressed and Oil has been on the slide since the meeting, which at one point on Tuesday was $5 lower than it was going into the meeting.

 

OPEC’s decision was by no means a consensus, several Oil ministers were left frustrated by the decision and refused to talk to journalist or just shook their heads. Venezuela had been leading calls for a 5% cut in production prior to the meeting and still believes this is the best course of action for OPEC to help stabilise Oil prices.

With so many members calling for output cuts it was left to Saudi Arabia, as the largest member to make the case for maintaining production levels, supported by other Gulf States. OPEC has plenty of experience in dealing with Oil price slumps. In the past they have made rather rash decisions to cut output in an attempt to raise price. Whilst it does cause a small rise in prices, the bigger impact is that they have lost market share as other producers increase their output to make up for the drop in supply and they are not able to reclaim their market share later on. This explains why Venezuela were not just calling for a 5% cut in OPEC’s output but a joint effort to cut production with other Oil producing nations such as Russia. OPEC are responsible for 35% of Global Oil supply, which means they are not in the all powerful position to control the market as they are sometimes made out to be.

There may be other motives driving the Saudi’s to maintain their level of production. Competition from the like of Shale Oil production may have been the reason behind the rise in OPEC production levels, as they seek to price high cost competitors out the market. However, this strategy seems to have been unsuccessful as their competitors do not appear to be as sensitive to low Oil prices as was initially thought.

The fall in Oil price is estimated to cost Saudi Arabia $90 billion a year and cost the rest of OPEC a little bit more. So calls for a policy change will only increase and get louder if the low price persists.

The next OPEC meeting is 6 months away, however, there has been indication that if Oil price was to continue to fall and be around $30 a barrel, they could have an emergency meeting. It remains to be seen just how low Oil can fall and what level would provoke a reaction from OPEC if such a level exists. With the growing discord amongst its members and suggestions that OPEC has ‘effectively dissolved,’ they may have lost their power to impact the price as they once did should they chose to.


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Reuters: Business News

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