OPEC Infighting and The Role of The US as A Swing Producer

Organization of the Petroleum Exporting Countries (OPEC) is an intergovernmental organization (13 countries), established in 1960 by the primary five members, and headquartered in Vienna, Austria from 1965.

OPEC produces 40% of the international oil and accounts for 73% of the global  “proven” oil reserves”. OPEC has a key impact on the international oil prices.

The members of OPEC had a meeting on April 17th, 2016 to decide on capping oil production to bolster prices.

They could not arrive at a consensus, raising doubts regarding the cartel’s continuation as the global energy swing producer; providing an opportunity to shale producers based in the US to take over the leadership position.

According to Dan K. Eberhart, CEO, Canary, LLC, and an expert on the U.S. and international energy policy, “It’s a distinct possibility. For decades, OPEC has set the global price of oil by controlling supply. But with shale production cutting drastically into OPEC’s market share, the cartel’s dominance has been in decline. Saudi Arabia, OPEC’s de facto leader, needs that market share”.

Saudi Arabia is initiating a strategy to compete with the US and other non-OPEC oil producers. However, if oil prices continue to be low, Saudi Arabia, which is the largest oil producing OPEC nation must restrict supply to increase prices.

Ensuring the market share is maintained is also pivotal for the continued dominance of OPEC. Market analysts believe, Iran’s influence is on the rise. OPEC experts felt the cartel would definitely freeze production to hike oil prices, but the cartel could not reach an agreement because Iran did not attend the meeting.

Ever since the West lifted the sanctions on Iran, the nation has increased its production to over 3.1 million barrels per day. Saudi Arabia urged Iran to accept the planned freeze. Iran’s non-conformance with the cartel’s decision resulted in the collapse of the deal.

This has provided an opportunity to shale producers in the US to play a dominant role in the global energy sector.

Any increase in oil prices is positive news for the shale producers in the US. Their improved efficiency in operations means, break-even prices have fallen, and production continues to improve (with substantially fewer rigs).

Again, an increase in prices would make mothballed rigs operational, thereby cutting into OPEC’s share. In fact, the spike in oil prices that led to shale production becoming commercially feasible was largely due to the OPEC’s decision to reduce the supply.

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