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Crude Oil Prices: Forced by the Powers of Supply and Demand

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Top crude oil producers

Currently, the major oil producers are Russia, Saudi Arabia, and the US. The top ten oil-producing nations hold a market share of 64% of crude oil production in the world. OPEC (Organization of the Petroleum Exporting Countries) was formed in 1960. OPEC’s members are Iran, Iraq, Syria, Kuwait, Saudi Arabia, Bahrain, Qatar, the UAE (United Arab Emirates), Oman, and Yemen.

OPEC pumps 40% of the world’s crude oil. It exports about 60% of the oil that’s traded globally. The huge market share gives OPEC an opportunity to impact the oil market. OPEC operates as a cartel. OPEC’s meeting is scheduled for Friday, June 5, 2015.

In November 2014, OPEC maintained its collective output target of 30 MMbpd (million barrels per day) and refused to cut the crude oil output.

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This time, OPEC will continue with the same strategy. It will increase the output target. Why? Massive production means lower crude oil prices. Lower oil prices mean that oil companies need to produce more to offset lower prices. As a result, high cost operating wells will be shut down. So, US shale oil producers like Laredo Petroleum (LPI), Whiting Petroleum (WLL), and Marathon Oil (MRO) will be impacted.

OPEC also has a fear of market share. If it cuts production, it means that non-OPEC countries—like Russia, the US, Canada, and Brazil—are scaling up production in recent years and putting pressure on OPEC. So, OPEC is left with limited options. This means that oil prices will be forced by the powers of supply and demand.

Morgan Stanley and Barclays suggest that OPEC might increase its output from its current 30 MMbpd target. This would be negative for oil producers because oversupply will push oil prices lower.

Energy ETFs like the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) and the Select Sector SPDR Fund ETF (XLE) mirrored WTI’s (West Texas Intermediate) crude oil price movement and declined during trade on June 3.

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