OPEC prepares for Vienna

The Organization of Petroleum Exporting Countries (OPEC) is an intergovernmental organization of 14 member countries, which collectively control ~40% of total world oil production and account for some 73% of the world’s proven oil reserves. Given their large market share of world oil supply, they play a key role in determining the price of global oil prices.

The price of global oil is determined by supply and demand functions. Some of the key drivers of global demand of oil include global GDP growth, FX rates and seasonal factors. An example of demand driven oil prices is the awakening and growing of China over the last decade, has seen it become one of the largest importers of oil. However, in last few years, China’s GDP growth has started to decline which has reduced overall demand for global oil, which in turn has weakened oil prices.

The other mechanic in the price of oil is the global supply of oil. Excessive supply will lead to depressed prices as supply exceeds demand. Over the past 2 years the current OPEC policy has been to “pump at will” to maintain market share and allow for only the most efficient countries to perform. The table below gives an outline of the daily production rates set by different OPEC and non-OPEC countries as of the October monthly report released by OPEC. Total world supply from OPEC countries totals 33.4 Million barrels per day which equates to 38% of world supply.  Other key non-OPEC suppliers of global oil include United States and Russia.

OPEC Countries

Sep-16

 

Non-OPEC Countries

2016

Algeria

1.085

 

USA

13.62

Angola

1.766

 

Other Americas

6.89

Ecuador

0.546

 

Europe

3.83

Gabon

0.211

 

Asia Pacific

0.44

Indonesia

0.722

 

OECD Total

24.78

Iran

3.665

     

Iraq

4.455

 

Other Asia

2.73

Kuwait

2.826

 

Latin America

5.12

Libya

0.363

 

Middle East

1.28

Nigeria

1.524

 

Africa

2.12

Qatar

0.659

 

DC

11.25

Saudi Arabia

10.491

     

UAE

2.994

 

FSU

2.8

Venezuela

2.089

 

Russia

11.04

Total OPEC

33.396

 

Other Europe

0.14

World Oil Supply

38.2%

 

China

4.12

million barrells per day

       

Source: OPEC Oct Monthly Report.

 

Total Non-OPEC

54.13

             

 

Suppressed global oil prices due to an oversupply of world oil are starting to have effects on the economies which rely on the oil industry; many of these are OPEC member countries. A vast majority of economic revenues are gathered from the oil industry for these OPEC nations. As the oil price stays at these levels and no underlying fundamental reason exists for higher prices, these OPEC countries have to wake up to the idea that they are slowly going broke. Evidence of this has been Saudi Arabia, the largest oil producer of OPEC, has recently issued 17 billion dollars in sovereign debt which in the past has held foreign reserves to maintain its economic balance sheet. As there is no other fundamental reason for rising oil prices in the near future, cutting supply makes sense. As most OPEC countries are oil dependant it is in the best interests of OPEC to cut production to drive prices up which in turn should help these OPEC economies. The collaboration of Non-OPEC countries in this production cut will also assist in rising oil prices.

On September 29th in Algeria, OPEC announced that production cuts would be required to push prices up to ensure stability in these OPEC nations. However deals of who will take the burden of the cut are unclear. These individual member production cuts/limits would be fleshed out in a Technical meeting in Vienna this weekend (27th – 28th October) and finalised in the ordinary OPEC meeting on the 30th of November. Some non-OPEC countries have been invited including Russia, Norway and Mexico. Russia has noted that it is in favour of production limits to drive oil prices up.

OPEC suggests that a group target of 32.5 mb/day is a good starting figure for the OPEC group to achieve. However, looking at the political landscape, many of the OPEC countries seem to have their reasons as to not enter production cuts. These reasons include losing out on the global market share to non-OPEC producers such as United States and Russia. Also in Iraq’s position they cannot stop producing due to the massive financial commitments of wars against terrorist groups.

The willingness to do a deal (it is 8 years since the last deal) indicates that some of these OPEC countries are feeling the pressures of suppressed oil price. This has been demonstrated with the recent events of Saudi Arabia which has been noted to be depleting foreign reserves therefore issuing sovereign debt. Once the specific production cuts have been dealt with and agreed with, it is up to the OPEC and non-OPEC countries who have participated in the deal to adhere to the limits. Another risk to the deal is weather cutting production is enough; demand plays an equally important mechanic for the prices of oil. However, one thing is for certain if a clear deal is reached it will definitely aid in rising prices in the global oil futures markets.

Picture by Alex.ch via flickr

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Reuters: Business News

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