Thanksgiving for the Whole OPEC Family

This Thursday, or Thanksgiving for those readers currently in the United States, marks more than a day to give thanks for what we have and eat until we sleep: it is the much-anticipated meeting of the Organization of Petroleum Exporting Countries (OPEC). Although all OPEC meetings are anticipated, as this is where the cartel determines changes in oil production that will affect global supply, this particular meeting is special.

Since this past June, oil prices have dropped almost 30% of their prices, peaking at 115$/barrel but currently trading at roughly 80$/barrel. At this meeting, OPEC will determine if changes in production need to be made in order to curtail the declining price or if they will continue the same level of production.

Why is the price of oil so important? Obviously, as one of the key inputs for transportation and machinery, it plays a big role for any country invested in these industries. Many East Asian countries, such as China, import their oil primarily from OPEC countries. As a result, the price of oil has a direct effect on East Asian countries. What OPEC decides to do with oil production will have an immediate impact on these countries, as well as their future growth potential.

So the real question becomes: Will OPEC actually decrease production in order to halt the falling price of oil? Personally, I feel OPEC will decide to continue the same production of oil and will do some in the foreseeable future. According to oil experts, OPEC will need to curb production by at least 3% (or 1M barrels/day) in order to bring supplies closer to demand. However, OPEC does not operate under normal business rules; they are a cartel who closely controls oil output, led by the largest producer Saudi Arabia. The majority of these oil production cuts will have to come from Saudi Arabia, and if they do not feel it is in their best interest, the rest of the OPEC members will follow suit. Other countries, such as Iraq, have mentioned that the unity of OPEC is more important than immediately changing oil production.

opec breakdown

However, some investors are cautiously awaiting OPEC’s decision. John Kilduff, a founding partner at Again Capital in NYC, has entirely removed himself from the oil market until the meeting is completed. Tariq Zahir, managing director of Tyche Capital Advisors, has only about one-fifth of the usual exposure in the oil market. According to him, any changes in output will either never occur or simply be symbolic, as Saudi officials have signaled that the production is unlikely to change. The options and futures contracts on the Nymex market outstanding fell by 13%, reflecting Zahir and Kilduff’s fear in the uncertain oil market.

If a nearly 30% price drop isn’t enough, at what price would OPEC decide “enough is enough” and finally change production? According to one OPEC official, 70$/barrel will lead to a panic in OPEC and result in reactive measures. As of now, the price is 80$/barrel, which according to the OPEC Secretary General Abdalla Salem el-Badri, “is concerning, but not yet a panic.” Most OPEC officials are on the record as saying that they don’t expect the price to drop below 75$/barrel, in which case no action will be necessary.

opec leaders meeting

*OPEC Leaders decisively deciding to do nothing

So where does that leave us? Well, if all goes as planned, the decline in oil prices will achieve a valley before hitting 70$/barrel, OPEC will do nothing to change their production, and investors will become more confident in the oil market in the weeks following OPEC’s meeting. If this were not the case and prices continued to decline, however, OPEC is going to need to make some major decisions. Given that many countries in OPEC rely on high oil prices to help balance their budget, those decisions will need to happen fast.

References:

  1. http://data.cnbc.com/quotes/%40LCO.1/tab/2
  2. http://online.wsj.com/articles/some-traders-step-back-from-oil-market-ahead-of-opec-meeting-1416860270?KEYWORDS=opec
  3. http://online.wsj.com/articles/crude-oil-futures-edge-higher-as-iran-u-s-negotiations-continue-1416832122?KEYWORDS=opec
  4. http://online.wsj.com/articles/oil-price-at-70-a-barrel-would-likely-trigger-cut-in-opec-output-ceiling-1415276042?KEYWORDS=opec
  5. http://online.wsj.com/articles/iraq-oil-minister-says-oil-prices-are-not-acceptable-1416865944?tesla=y&mg=reno64-wsj&url=http://online.wsj.com/article/SB10909804295654494231304580297291925969402.html
  6. http://www.usatoday.com/story/money/business/2014/11/23/opec-energy-oil-prices-meeting/19337455/
  7. http://www.cnbc.com/id/102213356#.
  8. http://www.eia.gov/countries/cab.cfm?fips=CH
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