OPEC Meet - The Cartel Sets the Course of Oil Prices

oil barrel and oil in shape of world map
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The Organization of Oil Exporting Countries meets twice each year. The oil ministers from the twelve member nations sit down to discuss policy for the coming six months. Each of the oil ministers comes to the table to advocate for the concerns of their individual nations. The mission of the cartel is to provide, "an efficient, economic and regular supply of petroleum to consumers, a steady income to producers and a fair return on capital for those investing in the petroleum industry." As OPEC sat down in Vienna on December 4, 2015, the lowest crude oil price in many years faced the oil ministers.

Within OPEC, there are economically strong members and weak members. The strong can survive a prolonged period of weak prices, the weaker members are not so fortunate. Nations like Venezuela, Nigeria, Angola, Algeria and Ecuador had been vocal and calling for production cuts shouldered by the stronger nations like Saudi Arabia, the United Arab Emirates, and Kuwait in the face of low prices. There is also friction between some of the members of the cartel. Saudi Arabia and Iran are on opposite sides of a proxy war in Yemen. The cartel faces issues that divide the membership and prevent it from effectively dealing with the sliding price on the energy commodity on which they depend for revenue. Moreover, non-OPEC oil producing nations like the United States and Russia provide significant output to the international market. Between these two nations, they produce just under two-thirds of the entire output of the twelve member nations on a daily basis.

At the past three meetings, the cartel decided not to cut production. They figured that a lower price would force high-cost marginal producers out of the market. The theory was that this would eventually lead to an increase in market share for the cartel members and a higher price as production from non-member nations became uneconomic.

This did not happen, perhaps in part, due to weakening global demand because of a lethargic global economy.

Leading up to the most recent meeting there was multiple clues that there was not a lot of agreement amongst the membership in terms of dealing with low oil prices. Several leading OPEC members, like Saudi Arabia, have said that they can see the price of crude oil dropping to the $20 per barrel level, half the price it was when the ministers sat down in Vienna at the last meeting on December 4, 2015. The Saudis have recently begun to borrow money by selling bonds; this is proof that the nation believes they are in for a long period of lower revenues due to weak oil prices.

In another hint that the cartel would not do anything to cut production at the meeting, the board of governors of the OPEC could not agree on a long-term strategy plan to present to the ministers at the last meeting. The board could not agree on a plan for production quotas for members, curtailing production and maximizing member profits and they decided to reconvene in 2016 to discuss these matters further. This told us that the December 4 meeting would not yield any real and tangible changes in the cartel's policy.

OPEC's stated production ceiling for crude oil is 30 million barrels per day; however, the members have been pumping in excess of 31.5 million barrels as the lower oil price has lead to cheating in order to recapture at least some revenues. Iran will be selling more oil into the market in the weeks and months ahead. An ease in sanctions against the nation is likely to increase daily output even more in 2016.  Therefore, it came as no surprise to the international oil market when there was no cut in production at the meeting. OPEC said that they will take a "wait and see" approach to the oil market for the months following the meeting. The next meeting will be on June 2, 2016, unless the cartel reconvenes in emergency session. Many cartel members said that the production ceiling was no longer at 30 million barrels per day and was more realistically at 31.5 million bpd.

 However, it is likely that the cartel members will pump even more oil than the higher ceiling level. OPEC met and the cartel set the course of oil prices for the coming six months. That path appears to be lower given non-action by the cartel, however; the price of crude oil often has more to do with politics than fundamentals. In the session after the OPEC meeting on December 14, active month NYMEX crude oil fell to lows of $34.53 per barrel, a new low and the lowest level since March 2009. Key support for the energy commodity is at the December 2008 lows of $32.48 per barrel.