How Does OPEC’s Decision Affect Oil Prices?

OPEC’s 161st meeting was held last week; according the press release, OPEC ministers agreed to maintain the current oil production in 2012, i.e. the production ceiling will remain at 30 Mb/d. Some already speculate Saudi Arabia may cut its oil production if oil prices would fall. Let’s examine the recent OPEC decision and understand how it may affect oil prices.

During June (up to date) oil price fell by 2.9%, the sharpest tumble came in May when oil price fell by 17.5%. United States Oil (USO) also decreased during that time by a similar rate. Energy stock prices such as Chevron Corporation (CVX) and Exxon Mobil Corporation (XOM) also plunged during May by 6.9% and 8.3%, respectively. This trend, however could chance if Saudi Arabia will cut its production quota.

OPEC decided to keep oil production quota unchanged at 30 million bbl per day. Keep in mind, the current oil production is higher than OPEC’s oil production ceiling: according to the recent OPEC monthly report of JuneOPEC’s oil production reached 31.5 million bbl/d in May. OPEC is responsible for nearly 40% of the world’s oil supply.

it has 12 members. The main reason for rise in recent months was due to the increase in Libya’s oil production that was nearly zero between March and September 2011 and currently (as of May) stands on 1.45 million bbl/d. Before the war in Libya commenced, Libya’s production was nearly 1.6 million bbl/d. During the Libyan war Saudi Arabia picked up the slack and raised its production. During that time in 2011 the total OPEC production ranged between 29 and 30 million bbl/d. Since the current production is higher than the ceiling and since Libya’s oil production continues to rise, it raises the chances that Saudi Arabia will cut its production quota. In such a case this could pressure up oil prices (assuming all thing equal).

During the first quarter of 2011Saudi Arabia’s oil production quota was 8.7 million bbl/d. as of May 2012Saudi Arabia’s oil production reached 9.6 million bbl/d. If Saudi Arabia were to cut its production by 1 million bbl/d, OPEC’s oil quota will reach 30.5 million bbl/d., very close to OPEC’s agreed upon ceiling.

The non-OPEC countries’ oil production edged up by 0.2 mb/d during May. According to the report, the increase was mostly due to the rise in North America’s supply. According to OPEC’s report the oil supply of non-OPEC countries is estimated at 53.07 million bbl/d in 2012, an increase of 0.67 million bbl/d compared to 2011.

From the demand side there are still concerns for an economic slowdown in U.S, Europe and China. This may have been among the factors to bring down the high oil prices in recent weeks. But since these economies continue to grow (even if at a slower than before rate) it means the demand for oil will continue to rise.

According to the IEA – International Energy Agency, OECD industry oil inventories rose by 17.3 million bbl to 2,643 million bbl in April. The oil stockpiles are slightly below the 5-year average.  But since major refineries ended their maintenance repairs, which lowered their output, oil market started to loosen up in OECD countries, mainly in Europe; this was probably among the reasons for the contraction in the gap between Brent and WTI in recent months.

In the U.S, petroleum and crude oil stockpiles continue to stock up but they are still below their level from last week.

So what does it mean? At the current stage oil market continues to loosen up and oil prices are likely to remain low (after considering the recent changes in the demand, storage and supply). On the other hand if Saudi  Arabia will cut substantially its oil production quota and bring it back to the level before the whole Libyan war started it could tighten the market and bring back oil prices (WTI) near the $90-$100 range.

The complete analysis could be found at seeking alpha. 

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