All about OPEC
OPEC is the association of major Oil-production nations which seeks to control Crude Oil prices by setting production limits for each member. It was founded in 1960 by Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. Over time, other more countries joined the organization.
The Organization of Petroleum Exporting Countries produces 46% of the world’s Oil. The group is currently operating under an agreement with a number of non-members to limit production, an arrangement which has been in place since late 2016, and they are known as OPEC+.
The main mission of OPEC “is to coordinate and unify the petroleum policies of its Member Countries and ensure the stabilization of oil markets in order to secure an efficient, economic and regular supply of petroleum to consumers”, as seen on opec.org. This means that OPEC is trying to prevent Crude Oil prices from getting too low or too high.
But in order to make the cuts, not only the member countries have to agree, but also non-members who have big production rates (such as Russia, who has a production rate bigger than any other OPEC member, including Saudi Arabia).
Usually, OPEC and OPEC+ members meet twice a year at their headquarters in Vienna. The main objectives are:
- Secure fair and stable prices for petroleum producers
- Coordinate and unify petroleum policies among members
- Ensure a fair return on capital to investors
- Maintain an efficient, economic, and consistent supply of petroleum for consumers
OPEC was created to stabilize the economic landscape in the Middle East and manage the global market for energy products. Oil is the main marketable commodity and money-maker for member nations like Iran, Iraq, Algeria, Saudi Arabia.
Even though the members invest billions of Dollars in exploration and production activities, it can take a while until any profits can be seen. They can wait between 3 to 10 years before any returns can come their way.
What influences the Oil price?
Besides the decision of OPEC to cut the production rates, Crude Oil price is also influenced by external factors, such as: revolutions, wars, weather, economic crisis, and health related issues.
These types of situations bring extra volatility and awareness on the Oil market. But, in order to keep a balance through difficult situations, OPEC might slash or increase the supply of Crude Oil, so that the price won’t collapse.
The rise of Shale Oil production in the U.S. adds to the challenge OPEC faces in seeking to manage prices. Now, the U.S. is the biggest Shale Oil producer. Producers can respond quickly with additional production if prices rise.
As an example, since the coronavirus began to spread internationally, the virus has already cut China’s Oil demand by millions of barrels a day, and that the slowdown is extending through the rest of the global economy.
China’s top gas importer, PetroChina, has declared force majeure on Natural Gas imports following the coronavirus outbreak. Following the OPEC meeting, the group said that the virus outbreak created an “unprecedent situation”. As seen, the Oil price can be easily influenced by international health issues, cuts from powerful nations, and so on.
By simply following the OPEC news, it is easy to see that for the past years production rates have been cut in order to maintain a balance on the market during difficult times.
Analysts think that Saudi Arabia will want a significant cutback because prices keep sliding, according to nytimes.com.
Global demand is forecast to be 0.48 million barrels per day, as seen on theguardian.com. The unprecedented situations, and the movements that the market makes daily, means risks are skewed to the downside, as seen on upi.com.
What’s to be done?
A change in the price of Crude Oil is noticeable after an OPEC meeting, and also in other commodities like Natural Gas or Gold. Like any other commodity, supply and demand affect Oil prices, and other related assets, like the ones mentioned before.
Natural Gas and Oil prices have started to be volatile since the 2008 financial crisis. Oil price is more volatile that Gas price, meaning Oil price might rise higher, and fall further than Gas price. Moreover, Oil price futures when traded on the commodities exchange can influence Oil’s price.
On Gold’s case, a way to analyze this relationship between it and Oil is by using a ratio between the two, according to technical analysts specialized in the commodities market. Over the past 25 years, the ratio between Gold and Oil has averaged at 15.8. It means that a troy ounce of Gold was worth on average the same as 15.8 barrels of U.S. Crude Oil.
When the ratio is high, it means that Gold is overvalued compared to Oil; Gold is too expensive, or Oil is too cheap. Also, it can be the other way around. Obviously, by the next OPEC meeting changes can happen.
OPEC decisions have had influence on worldwide Oil prices ever since the organization was created.
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Sources: investopedia.com, investing.com, nytimes.com, theguardian.com, bbc.com, cnbc.com, upi.com
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