This is a syndicated repost published with the permission of Money Morning - We Make Investing Profitable. To view original, click here. Opinions herein are not those of the Wall Street Examiner or Lee Adler. Reposting does not imply endorsement. The information presented is for educational or entertainment purposes and is not individual investment advice.
That’s the biggest question on energy investors’ minds ahead of the cartel’s meeting this week. On Dec. 4, oil ministers from OPEC’s 12 nations will congregate in Vienna to discuss the state of the oil market moving into 2016. Heads will be turned toward Saudi Arabia, which has led the cartel’s policy of overproduction to maintain market share even as oil prices hover near $40 a barrel.
The Organization of the Petroleum Exporting Countries has historically been stubborn toward lowering output. At the last meeting on June 5, the cartel said it would maintain its collective production of 30 million barrels a day. The announcement was the second time since November 2014 the cartel aimed to lower global prices to edge out competitors rather than stabilize the market.
“OPEC members like Venezuela, Nigeria, Libya, Ecuador, and Iran are experiencing significant financial constriction,” Money MorningGlobal Energy Strategist Dr. Kent Moors explained last month. “Because the cartel members are all dependent upon oil sales and run undiversified economies, the collapse in crude prices hit every one of them hard.”
Venezuela’s economy is struggling the most from Saudi Arabia’s high-volume initiative. From September 2014 to November 2015, the country lost roughly $36 billion in oil export revenue. Back in August, Venezuelan oil officials contacted Mohammed al-Sada – Qatar’s oil minister and president of the OPEC conference – to figure out a way to both stabilize prices and protect market share.
But other large OPEC members like Saudi Arabia and Kuwait are mainly concerned with Russia’s cooperation. The Saudis have tried to establish healthy relations with the non-OPEC member for years. That’s because they want a piece of Russia’s massive oil reserves and geographic dominance. After all, adding Russia to the OPEC roster would increase the cartel’s global market share by 33%.
The Saudis have repeatedly said lowering production would be pointless if Russia refuses to establish a rapport. If Saudi Arabia keeps it up, the OPEC countries on the verge of economic collapse might start fighting back.
“A transition of the crisis to the political realm would mark the beginning of a Latin American parallel to the Arab Spring,” Moors explained.
With all of this dissension among OPEC’s ranks, people are wondering if OPEC will cut oil production at the Dec. 4 summit.
Here’s the one factor OPEC’s decision hinges on…
Will OPEC Cut Production by 2016?
It all depends on Saudi Arabia.
Since market share is its only concern, oil prices as low as $40 won’t pressure officials to cut production. The cartel used to make up 60% of the global oil market. Now, thanks to the growing U.S. fracking industry, OPEC controls only 40%.
You see, Saudi Arabia is OPEC’s largest producer. According to YCharts, the country’s daily output rose from 10.29 million barrels in July to 10.34 million in August. That’s one-third of the entire cartel’s daily production.
OPEC members are trying to convince Saudi Arabia to take the lead and cut its own production. Venezuela already pleaded with the Saudis to no avail. According to MarketWatch, Iran, which is set to boost production as sanctions are lifted from the nuclear agreement, has also pressured Saudi Arabia to decrease output.
But Saudi officials have stressed they won’t give in to supply demands until U.S. producers cut their output.
“Not even at $20 – they will not budge alone,” said Richard Hastings, macro strategist at Global Hunter Securities, in September. “They are waiting for U.S. production to decline much further.”
About Money Morning: Money Morning gives you access to a team of ten market experts with more than 250 years of combined investing experience – for free. Our experts – who have appeared on FOXBusiness, CNBC, NPR, and BloombergTV – deliver daily investing tips and stock picks, provide analysis with actions to take, and answer your biggest market questions. Our goal is to help our millions of e-newsletter subscribers and Moneymorning.com visitors become smarter, more confident investors.
Disclaimer: © 2015 Money Morning and Money Map Press. All Rights Reserved. Protected by copyright of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including the world wide web), of content from this webpage, in whole or in part, is strictly prohibited without the express written permission of Money Morning. 16 W. Madison St. Baltimore, MD, 21201.
Join the conversation and have a little fun at Capitalstool.com. If you are a new visitor to the Stool, please register and join in! To post your observations and charts, and snide, but good-natured, comments, click here to register. Be sure to respond to the confirmation email which is sent instantly. If not in your inbox, check your spam filter.