OPEC output rose in January, reversing trend that buoyed oil prices

2013.02.28 - OPEC Production 2Enlarge GraphOPEC, or the Organization of the Petroleum Exporting Countries, is an intergovernmental organization that represents 12 oil exporting countries (Iraq, Iran, Kuwait, Saudi Arabia, Venezuela, Libya, United Arab Emirates, Qatar, Algeria, Nigeria, Ecuador, and Angola). OPEC produces ~60% of the crude oil traded internationally. Therefore, the organization can have a strong influence on the market and OPEC nations convene regularly to coordinate petroleum policy (generally by directing price and production). Thus, the collective can have a significant effect on oil prices.

In February, OPEC production rose by 97,000 barrels to ~30.7 million barrels per day up from ~30.6 million barrels per day in January. This is the first time that oil production from OPEC rose since August 2012. The increase in supply, taken as an isolated data point (that is, not accounting for decreases in supply from non-OPEC nations, or an increase in demand), is a negative short-to-medium term catalyst for oil prices and oil producers such as ExxonMobil (XOM), Chevron (CVX), ConocoPhillips (COP), and Hess Corp. (HES) as well as for energy ETFs such as the Energy Select Sector SPDR (XLE), as increased supply results in lower prices.

The increase in OPEC production came primarily from Libya and Nigeria. In contrast, production from Saudi Arabia, the largest contributor to OPEC production continued to drop and is down ~9% since August of last year. The below chart displays OPEC production splits by country.

2013.02.28 - OPEC Production Pie 2Enlarge Graph

As stated, Saudi Arabia is the largest producer in the OPEC group and production from the country continues to decrease as seen in the below chart.

2013.02.28 - Saudi Production 2Enlarge Graph

The chart shows that Saudi oil production had surged during 2011 and 2012 as the country increased production in response to the Libyan crisis during the Arab spring. However, Libyan production has since come back online prompting Saudi Arabia to cut back to maintain the oil supply/demand balance. If other countries increase production, Saudi Arabia could potentially further cut back its own production to buoy prices.

Thus, the OPEC supply increase in itself is a negative short-to-medium catalyst for oil prices and thus producers such as XOM, CVX, COP, and HES. However, investors should note that Saudi Arabia could reduce production, non-OPEC production could decline, or demand could increase to erase any price weakness as a result of this.