Has OPEC Lost Some Of Its Muscle?

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Oil bulls have been long-pining their hopes for a swift recovery in crude to the Organization of Petroleum Exporting Countries (OPEC). The infamous oil cartel used to have legendary control over the international petroleum market, and even rumors of it taking action could send crude to the stratosphere.

Nowadays, OPEC has lost some of its muscle, but it’s still a widely followed organization that has the market’s respect, if not its admiration. OPEC in fact recently added a thirteenth member, Indonesia, and it is still a desirable club to join.

On Friday, OPEC will convene a meeting in Vienna, Switzerland, followed by an afternoon press conference. At that meeting, oil bulls are speculating that OPEC may choose to cut production levels. If OPEC does in fact do so, it would provide quite a jolt for the struggling crude oil market, which on Wednesday took another turn lower. NYMEX crude has now fallen to below $41/barrel.

Various OPEC members are facing great difficulties with their budgets due to oil’s decline over the past year. The Latin American OPEC states are in particular trouble with Ecuador’s economy slumping and Venezuela being trapped in a hyperinflationary nightmare.

Angola, Algeria, and in particular Nigeria are also far from paragons of economic prosperity at the moment. These countries can little afford to cut production. Nigeria, for example, relies on oil to account for a shocking 95% of its total gross exports. The Nigerian Naira would undoubtedly be forced to devalue against the US Dollar yet again if OPEC were to tell Nigeria it had to produce fewer barrels per day.

The wealthier OPEC nations, such as Kuwait, Qatar, and Saudi Arabia are unlikely to want to cut production. Yes, they too are suffering from lower crude prices, but not nearly to the degree that the weaker states and private oil industry are.

Saudi Arabia and Kuwait have the reserves to sit out at least a few years of this new very low oil price environment, while their competition struggles. The longer oil stays down here, the more bankruptcies there will be in the private energy markets, and the more reluctance investors will have to sink money into new oil projects in the future.

Additionally, the fall in oil is absolutely crushing the alternative energy industry. Look at SunEdison, down 90 since this summer. Abengoa, Spain’s solar giant, is now on the brink of receivership, threatening to become Spain’s largest corporate bankruptcy ever.

Even wunderkind Elon Musk’s SolarCity has fallen by half this year. The amount of damage Saudi Arabia can do to alternative energy sources by keeping prices stuck down here is immense.

This brings us back to Friday’s OPEC meeting. OPEC currently has a daily quota for its combined member states’ oil production at 30.3 million barrels.

The cartel is already failing to hold its line, with production from the member countries (not counting newly added OPEC member Indonesia) at 32 million daily barrels. That’s 5% over the limit, and that oversupply alone accounts for a large portion of the international oil glut. It is estimated there are roughly 3 to 4 million barrels per day too much supply at present, and OPEC is accounting for half that.

The oversupply threatens to get worse as Iran, thanks to the recent agreement with President Obama, is now exiting sanctions and is aggressively courting investors to bring its oil production levels back up. Estimates suggest Iran will be able to add another 0.5 million barrels per day almost immediately and bring that up to 1 million barrels per day of new supply with time.

Given that OPEC is already more than 1.5 million barrels per day over quota, and member state Iran is defying the cartel’s wishes by adding more supply, it is hard to see how they could cut. Who would take the brunt of the lowered output levels?

Saudi Arabia has made it extremely clear it no longer is willing to be the swing producer of oil, and none of the other member states are strong enough to enforce a production cut on their own.

If anything, OPEC will likely raise the, admittedly symbolic more than anything, daily production quota to 31 million barrels per day to account for the 0.7 million or so barrels Indonesia brings to the table.

That news would do nothing to stem oil’s slide. On Wednesday, oil prices briefly spiked following news that a supposed majority of OPEC members want to cut production. This was rapidly followed by a dive in oil prices following news that Saudi Arabia wasn’t on board with that desire.

And so it will be on Friday as well, there simply isn’t the combined will necessary within OPEC to cut production. At this point, it’s more of an each member state for itself sort of deal.

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