Sunday, November 29, 2015

OPEC: Looking into the Abyss

OPEC is in crisis. With Brent crude trading at around $45 a barrel, the price of oil has traded lower and for longer than most analysts anticipated since the oil price collapse that began late last year. The oil price shock has brought the Venezuelan economy to its knees, is threatening Saudi Riyal's peg to the dollar and has put Russian economy into recession. Meantime Saudi Arabia, the Gulf states and Russia are fighting expensive wars in Syria and Lebanon. 

Sooner or later something has to give because if nothing comes out of the OPEC meeting scheduled for this Friday, and nothing is expected, there are more than a few analysts who believe that the oil price could fall into the low $30s or perhaps into the $20s. Although OPEC is nowhere near as strong as it once was it still accounts for about 31 million barrels/day  of output, approximately 1/3 of  global production of about 94 million barrels/day which is about 2 million barrels/day too much. Add in Russia's 11 million barrels/day of output you get to about 45% of global production.

My guess is that the current pain that OPEC and Russia are feeling and the prospect of future pain coming from another break in oil prices is too great. OPEC in concert with Russia will act to reduce output. While there was much press commentary about Syria when Putin met with the Saudi Foreign Minister in Moscow a few weeks ago and again when Putin met with the Ayatollah Khamenei in Tehran last week, there was nary a comment on oil prices. It strains the imagination to think that they did not talk about oil prices. Thus the surprise coming out of the OPEC meeting will be recommended cuts in output with the implicit cooperation of Russia. All it would take would be a 5% drop in the combined output of OPEC and Russia to bring supply and demand into balance.

But you would say I am not taking into account the planned increase in Iranian oil exports. I think that is over-rated because Iranian oil is already finding its way into the market outside of the sanctions regime.

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