OPEC- Dominance Fading.
OPEC- Dominance Fading.
Head- Client Advisory at SNMA Enterprise Pvt. Ltd.
Oil futures on Friday(4th Nov 16) were on course for their biggest weekly(%) decline since January, over 10% since mid Oct, as signs of tensions resurfaced between Saudi Arabia and Iran that could scupper a key supply cut pact.
§ Though, a few weeks ago, it seemed like crude oil had finally bottomed. After years of indecision, OPEC looked ready to act. Ready to cut production to stabilize oil prices. Until now, OPEC had been pumping crude oil at record rates. Their goal was to drive down prices and drive out higher cost US producers.
§ But now, prospects for an OPEC deal have weakened. Oil prices continue to fall. The cartel’s inability to stabilize prices come as no surprise. Here’s why:
First, their share of global oil production is declining.
In the 1970s, the cartel (OPEC) accounted for over half of global crude oil production. In recent years, that number has fluctuated between 30-40%. Today, the US produces more oil than Saudi Arabia.
Source: EIA (US)
Second, political factors limit cooperation. Iran wants to increase production as it rejoins the world market. Iraq wants an exemption as it rebuilds its country. Everyone wants Saudi Arabia to shoulder the burden of oil production cuts. But the Saudis themselves are suffering from lower oil revenues. In fact, they recently issued bonds worth $17.5 billion to shore up their finances.
Third, doing so would hurt themselves. Producers like the US and Russia could easily fill the production gap. Prices wouldn’t end up rising. OPEC would be worse off.
What does this mean for crude oil prices?
§ The supply picture puts an upper limit on how high prices can go. If prices were to go up due to OPEC or other factors, new supply would come onto the market. So crude at $100 is not anytime soon. A few years ago, $100 for a barrel of oil seemed cheap!
§ OPEC is losing its dominance. Their market power has diminished. Their ability to impact prices is limited. Soon, OPEC may fade into the history books, as the world scouts for greener energy.
§ For oil importing countries, this is great news. Over the last few years, India’s budget deficit has fallen considerably. Mostly due to a lower oil import bill.
§ For oil exporting countries, this is an adjustment. An adjustment to a market where suppliers compete. A market without fixed production targets. A market where supply is plentiful and prices are low. I simply call it adjustment of wealth from Oil Producers to Oil consumers.
§ Downside of this low crude price? Maybe. Cheap crude can limit energy from renewable and less polluting sources. But that’s another story, for now at least. As a consumer of Oil, I CHEER.
SNMA Capital Advisors.