Is OPEC heading for a sinkhole?

October 8, 2014

Turmoil is rarely good for the bottom line. Saudi Arabia, Qatar and the United Arab Emirates are joining Washington’s anti-Islamic State air strikes within the borders of neighboring OPEC member Iraq. Fellow OPEC partner Nigeria just barely dodged an Ebola scare, while founding member Iran remains under sanctions aimed to curb its nuclear ambitions. Meanwhile, Russia, which last year produced an estimated 10.4 million barrels of crude oil a day, doesn’t look set to extricate itself from Ukraine any time soon.

Much of the oil-producing world is in turmoil, yet OPEC prices have fallen almost 20 percent since June. The reasons for this are complex, but include significant increases in the U.S. production of shale oil—also known as “tight oil”—over the past few years, which have eroded the American demand for imported oil.

As these Reuters graphics show, the price of Brent crude oil—the Middle East standard—just dipped beneath $100 per barrel for the first time in four years, and more than half of OPEC’s 12 member nations are in the red against their price per barrel breakeven point, with only Kuwait and Qatar healthily in the black.

This puts many of OPEC’s members in a tight spot. While some analysts view their next meeting, in November, as a chance to curb production with the goal of pushing prices higher, others see the cartel on shaky ground, with lead dog Saudi Arabia ready to wage a price war against its longtime partners.

We’ll see how things shake out. As author James Holland said, “The Middle East is a region where oil is thicker than blood.”

 

2 comments

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An article that discusses the major price decline in Brent oil since June but fails to mention — indeed, to stress — the explosion in the exchange value of the dollar in the exact same time period is incompetent financial journalism, to put it mildly. Oil is a dollar-denominated commodity (meaning that it’s priced in dollars). Outside of the US, the world has to buy dollars in order to pay for oil. Thus merely to preserve the existing economic price for oil, the dollar price of oil must go down to counter the increase cost of obtaining the necessary dollars. For the past three months, the cry on Wall Street has been “Buy dollars, sell oil.” And this trade is paying off, big-time.

This is unquestionably the most important factor in the sudden collapse in the oil price. The world didn’t suddenly just wake up in June and decide there was too much oil floating around.

Next time, find a qualified person for a piece like this.

Posted by From_California | Report as abusive

To suggest that the current strength of the US dollar is the sole cause for the drop in the price of oil is ludicrous. While the US currency is a factor in oil pricing, in a global commodity, supply and demand (perceived or real) are the paramount factors in establishing the price.

The real question should be why has the price of oil stayed so high despite the growing glut in supply?

Saudi Arabia will purposely lower prices in order to undercut and make unviable North American suppliers who have higher production costs. They recognize that in the long game, only a lower price (which they can afford) will prevent the North American suppliers from eating their lunch.

This will be unpopular with other OPEC members. We could well see the end of OPEC as a cohesive organization, as other OPEC members have expenditures which nearly match their revenues from their oil output. We certainly will see a lot of acrimony among OPEC members.

Oil’s days are numbered as the number one energy source in any case–and the high price of oil has made alternative supplies and research into alternatives more economically attractive. (not to mention environmental reasons)

I am confident that the technology for mass storage of electricity will be sufficiently advanced in the next 10 years to allow the deserts of the world to become global solar energy sources. With abundant electricity, the electrolysis of water to obtain clean-burning hydrogen is the next logical step.

Posted by MaskOfZero | Report as abusive