OPEC or the Organization of the Petroleum Exporting Countries – the international cartel of oil producers – is scheduled to meet in the Austrian capital of Vienna on Friday, December 4. As usual, the outcome of the gathering of the group's 12 member countries from the Middle East, Africa and Latin America is expected to have far-reaching implications for all involved in the oil trade – from retail stations to budgets of oil-dependent nations.
Pump, Baby, Pump
When OPEC last met in June, it extended its now year-long strategy to maintain daily crude production level at the preset 30 million barrels, defying expectations of an output cut in response to the prevailing supply glut. The organization believes that the plan to ‘keep on pumping’ would ultimately revive demand and more importantly, peg back growing competition from the U.S. shale industry.
Has the Shock Therapy Worked?
Following the shock therapy, oil prices seemed to have stabilized earlier this year. The commodity largely traded range bound in the $50-$60 level – a price OPEC considers ‘fair’ for their crude but one that drive higher cost producers out of business.
But it's been mostly downhill ever since.
Currently, crude prices are trading just over $40-a-barrel after hitting a new 6-1/2 year low of $37.75 set in August.
Market Consensus Suggest Another Status Quo
It is still widely expected that OPEC will maintain its official output level at 30 million barrels a day for months more to come. Again, there is no urgency on the part of the once-dominant body, which still supplies around 40% of the world's crude, to try and push prices back up into the $70s through production cuts. Moreover, with rapid production growth in the non-OPEC countries, there is a risk that even a large curtailment in volumes may not be enough to support prices.
Saudi Arabia vs. Rest of OPEC
In particular, Saudi Arabia’s stance is of utmost significance. Riyadh, by far OPEC’s major contributor, is relatively better insulated from the oil shock as compared to some other members. Though around 90% of Saudi Arabia’s government revenues are earned through crude, it is still better equipped to handle the commodity at current price levels.
However, for countries like Venezuela, Nigeria and Iran, $40-a-barrel oil is a real problem as these states are highly dependent on the commodity to fund government budgets and cannot withstand prices lower than this.
Over the past 12 months, Saudi Arabia has dropped enough hints about its continuing strategy to preserve market by pumping oil almost flat-out rather than trying to prop up prices by modifying production limits.
Situation More Complicated than a Year Ago
The worsening oil rout has made it difficult for OPEC to stick to its output policy. Things took a turn for the worse on mounting worries about China’s crude demand and the Iranian nuclear framework agreement, which has the potential to release more of the commodity in the already oversupplied market.
Facing increasing pressure to reduce oil output, a report suggests that Saudi Arabia is planning to broker a deal to balance the market. In the first sign that the cartel’s most influential member is willing to compromise, Saudi Arabia is likely to propose OPEC to scale back volumes by 1 million barrels per day. However, the policy change – if proposed – comes with a caveat: that the members outside the organization will have to trim their output as well.
This seems highly unlikely though, given that non-OPEC producers like Russia and Mexico are not expected to agree to such a plan.
E&P Companies in Focus
The volatile oil exploration and production companies will be the most affected by the OPEC meeting’s outcome, as their fortunes are tied to commodity price fluctuation. Energy investors will be closely tracking S&P components including Apache Corp. APA, Noble Energy Inc. NBL, Murphy Oil Corp. MUR, Pioneer Natural Resources Co. PXD, as well as small-caps like Stone Energy Corp. SGY, Sanchez Energy Corp. SN, etc.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Be the first to comment