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6 reasons why OPEC will not cut crude production levels

The oil cartel faces a slew of challenges, including slowing demand in countries like China and India

Vinod Sharma  |  Mumbai 

The Organisation of Exporting Countries will hold its 167th meeting in Vienna on June 5. The 12-nation cartel would review the developments since the last meeting on November 28, 2014 and decide on the strategy forward.

Nymex closed Wednesday at around $59.64 a barrel. It was around $75 barrel at the last meeting. In between it saw a low of $42.05 in March 2015.

At its last meeting, had kept its quota of 30 million barrels a day unchanged amidst a cry from members like Venezuela to cut production, so that prices could improve.

Countries like Nigeria and Venezuela are asking for a cut. Venezuela needs a price of $120 per barrel to support its economy. There also has been a slight change in stance of Saudi Arabia, since the last meeting.

Instead, of saying that they'll never cut production, this spring officials have repeatedly stated that the entire cartel and non-players like Russia would need to join and bear the burden of a cut as in 1986 and 1998.

The softening of the stance, not withstanding, we believe will hold its current levels. OPEC just can’t afford to cut

These are the reasons, why we believe the OPEC can’t and will not cut production.

OPEC is losing its sheen

Though OPEC owns 80% of the world’s known reserves, it accounts for just 33% of global supplies.

In the past, OPEC could cut production to increase prices and produce more to bring prices down.




But these days it does not have the same clout. If OPEC cuts production, countries like Russia may continue to produce at record levels, making inroads into OPEC’s market share.

Desire to maintain market share

OPEC does not want to lose market share at any cost. Saudi Arabia had suo-moto reduced prices for the supplies in early November. prices tanked after November 28 when OPEC held its production levels. Despite crude tumbling to around $42 a barrel in March this year, OPEC continued to produce at record levels.

Its strategy is working

By continuing to supply Crude at lower levels, OPEC wants to throw the weaker hands out of business, specially the Shale Oil producers in the

An average shale producer breaks even at around $77 per barrel. The best shale producers - like EOG Resources and Pioneer Natural Resources– are likely making money with oil at $65 … but they’re getting squeezed.

oil production dipped in February but was up again in March. The rig count was drastically down by half in March and a third in May.

OPEC is beginning to see the kind of results it set out to achieve by not cutting production in November, 2014. There is no way OPEC will now blink when it is on the home run.

No one honours quotas

OPEC now knows that members produce more than their quota. For the past three and a half years, OPEC has stuck with its quota of 30 million barrels of day. But in all the past six months, its production has been more than 31 million barrels a day.

So if OPEC wants, it can regularize this excess production.

crude is waiting to enter

June 30 is the deadline for and the six nations ( U.S., Russia, China, France, UK and Germany ) to enter an agreement under which will give up its right to nuclear device in return for lifting of international bans. Once this is reached, around a million barrels of oil per day would enter the global trade. This will bring prices down.

So, again, OPEC can’t consider a reduction in production at this juncture.

Global demand is slowing

The OECD just reduced its estimates of global GDP growth to 3.1% from 3.7% earlier. The bulk of the incremental oil demand has come from and Analysts have long questioned the data on Next on the suspect list may be India, as the periodic data given does not match the official GDP figures. Korean export data is well respected and has long been a barometer of global economic growth. That data is on the decline since November 2014.

With the Indian Meteorological Department announcing a deficient monsoon forecast, the Reserve Bank of shutting the doors on any further interest rate cut, and corporate results falling short of market expectations, the only saviour for the markets could be crude.

Here’s hoping that an OPEC meeting that doesn’t cut production and an Iran nuclear deal later in the month, send crude down and ultimately help our markets.

Top Oil Producers in 2014

Rank Country Production/Day in mn Share of World (%)
1
RUSSIA
10.11
14.05
2
SAUDI ARABIA *
9.74
13.09
3
USA
9.37
12.23
4
4.19
5.15
5
CANADA
3.60
4.54
6
IRAQ*
3.37
4.45
7
IRAN *
3.11
4.14
8
UAE *
2.82
3.32
9
KUWAIT *
2.62
2.96
10
MEXICO
2.56
3.56
11
VENEZUELA *
2.50
2.62
12
NIGERIA *
2.42
3.05
13
BRAZIL
2.26
2.31
14
ANGOLA *
1.83
2.31
15
KAZAKHSTAN
1.57
1.83
    *OPEC Members

(The writer is the business head for the Private Client Group at HDFC Securities)

First Published: Fri, June 05 2015. 08:07 IST
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