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, June 5. As usual, the outcome of the gathering of the group's 12 member countries is expected to have far-reaching implications for all involved in the oil trade – from retail stations to budgets of oil-dependent nations.
Market Consensus Suggest Status Quo
When OPEC last met in November, it decided 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 has revived demand to a certain extent and more importantly, pegged back growing competition from the U.S. shale industry.
Following that shock therapy, oil prices seem to have stabilized over the past two months after sinking to a 6-year low of under $44 earlier this year. The commodity has largely been range bound in the $50-$60 level since early April – a price OPEC considers ‘fair’ for their crude.
As a result, it is widely expected that OPEC will maintain its official output level at 30 million barrels a day for months more to come. Like last time, 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, $60-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.
However, 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.
Can OPEC Spring a Surprise and Actually Hike Output?
Some observers are of the view that there is a remote probability that OPEC might actually raise its official production quota to 30.5 million barrels per day, rather than cut it. With volumes currently at around 31 million barrels per day, an increase would in fact be closer to its actual production. But such an outcome can lead to a selloff by speculators, leading oil to start its downward journey afresh.
E&P Companies in Focus
The volatile oil exploration and production companies will be the most affected, 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 Miller Energy Resources Inc. MILL, Sanchez Energy Corp. SN etc.
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