OPEC – Facts v/s Fiction

The recent collapse in oil prices has arguably been the most startling and far-reaching market development since the Global Financial Crisis. It has also and again shifted the world’s eyes towards OPEC – The Organization of the Petroleum Exporting Countries – an organization established in Baghdad, Iraq in September 1960 and headquartered in Vienna.

For those not familiar with OPEC, the organization’s mandate is to “coordinate and unify the petroleum policies” of its members and to “ensure the stabilization of oil markets in order to secure 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.

In 2014 OPEC comprised twelve members: Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates and Venezuela.

OPEC was formed when the international oil market was largely dominated by a group of multinational companies known as the “seven sisters”. The formation of OPEC represented a collective act of sovereignty by oil exporting nations and marked a turning point in state control over natural resources. In the 1960s OPEC ensured that oil companies could not unilaterally cut prices. In December 2014, OPEC and the oil men were named in the top 10 most influential people in the shipping industry by Lloyds.

While most oil analysts still give much credence to OPEC’s power regarding oil prices, I personally believe the era of OPEC is over.

The 54-year-old organization still exists on paper, but it’s unclear whether it wields any influence as a cartel above and beyond the desires of one member: Saudi Arabia. OPEC has really, in my opinion, dissolved as a cartel…. …the fact that some members still have spare productive capacity while others are facing structural declines ahead following years of underinvestment and lack of capital may have further widened the gap in perspective between the various interest groups. Diverging geopolitical interests and ideological rivalries among some members may have done the rest.

  • Iran is reportedly pleading with the Saudis to stabilize the price.
  • Venezuela, which is basically funded by oil production, is so broke that parts of Caracas are having blackouts.
  • Iraq is having to cut back its already tight 2015 budget.
  • Libya can’t get back on its feet.
  • There’s a huge threat of civil unrest in Nigeria heightened by falling oil prices.

Meanwhile, the Saudis are sitting back, letting prices fall, and trying to starve out American producers — because they can. That said, it does seem that smaller Gulf states like Kuwait and the UAE are on board with this plan.

So who is really in control of oil prices?

One thing for sure is that OPEC is not. OPEC officials have in fact repeatedly intimated that the recent collapse in the price of oil was not related to OPEC’s actions or a fundamentally sound market.

I believe OPEC’s decision back in November to maintain its production target was not aimed at anyone specifically.
Some people say this decision was directed at the United States and shale oil. All of this is incorrect. Some also say it was directed at Iran. And Russia. This also is incorrect.

I do not believe the fundamentals should lead to this dramatic reduction in price… Doesn’t make any sense.

If OPEC is indeed keeping oil production high in an effort to squeeze out U.S. shale producers, they may have a long, long wait for their strategy to play out.

It is a fact that despite low oil prices, U.S. producers keep pumping more and more oil.

As a result, inventories are on the rise, and there appears to be no end in sight to the glut in oil production. For OPEC, this could be a long and costly battle.

I believe that what’s driven oil prices lower in the last six months is a simple imbalance of supply and demand. The world — and the U.S. in particular — is producing more oil than it consumes, and eventually, that leads to falling prices. In the oil industry, it can be difficult to see oversupply coming, but when everyone realizes it’s here, prices can fall rapidly as they did.

The problem in oil today is that oversupply isn’t going to stop anytime soon. In fact, the problem is getting worse, even with oil trading around $50 per barrel.

Part of the problem is the lag between when an oil well is drilled and when it becomes uneconomical to keep operating it. For example, an oil company may have an all-in cost of $70 per barrel for oil from new wells, so it may determine that drilling a new well today isn’t economical and won’t drill it. We’re seeing those decisions in the form of major cutbacks in capital spending plans across the industry.

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Written by

Ziad K. Abdelnour, Wall Street financier, trader and author is President & CEO of Blackhawk Partners, Inc., a private family office that backs accomplished operating executives in growing their businesses both organically and through acquisitions and trades physical commodities – mostly oil derivatives – throughout the world.

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