OPEC's Meeting: Price Wars Continue in the Global Crude Oil Market
OPEC’s meeting
On Friday, December 4, 2015, OPEC’s (Organization of the Petroleum Exporting Countries) meeting was held in Vienna. The outcome of the meeting didn’t favor the oil market. Prices fell on the day. OPEC member nations didn’t discuss any price ceiling or collective production target for the group. It suggests that the group members can produce at record levels. So, the oil market will be flooded with excess oil. It could extend the global bear market. There could be a new era of lower crude oil prices.
OPEC’s strategy
OPEC maintained its collective output targets of 30 MMbpd (million barrels per day) in the last two meetings in November 2014 and June 2015. However, it produced more than 30 MMbpd of crude in the last 18 months. OPEC produced 32.1 MMbpd of crude oil in November 2015. Its intentions and strategy are very simple and clear. It wants to produce more crude oil to offset the lower crude oil. Also, it wants to capture its lost market share in the US. The tussle for the market share will ignite price wars in the global oil market. We could see prices trade lower.
Conflict of interest
There’s a conflict of interest between some group members like Venezuela and Saudi Arabia. Countries like Venezuela want OPEC to curb production and a set price ceiling. However, Saudi Arabia thinks the idea might work in its favor because OPEC isn’t a swing producer. The US and Russia are producing at record levels. For example, if OPEC decides to curb production by 2 MMbpd, the supply and demand will balance. The IEA (International Energy Agency) estimated a global surplus of 1.7 MMbpd in fiscal 3Q15 as of its report on November 13, 2015.
So, prices will rise. Higher oil prices will motivate the US as well as other OPEC and non-OPEC group members to increase the production. As a result, the strategy might provide short-term benefits. Over the long term, Saudi Arabia’s strategy of excess production will benefit oil producers.
The high-cost US shale oil producers like Whiting Petroleum (WLL), Continental Resources (CLR), and EOG Resources (EOG) are impacted the most due to lower oil prices. The uncertainty in the oil market impacts ETFs like the iShares US Oil Equipment & Services ETF (IEZ) and the First Trust Energy AlphaDEX ETF (FXN).
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