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OPEC’s Strategy and Iran’s Sanctions Impact the Crude Oil Market

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OPEC production

OPEC (Organization of the Petroleum Exporting Countries) produces 40% of the global crude oil production. It has a 60% share in global crude oil exports. OPEC member nations produced 31.2 MMbpd (million barrels per day) of crude oil in May 2015—compared to its target of 30 MMbpd.

On June 5, 2015, OPEC decided to maintain its collective output target of 30 MMbpd of crude oil for the next six months. The consensus of a massive production strategy will drive crude oil prices lower. Lower oil prices impact US shale oil producers like Whiting Petroleum (WLL), Continental Resources (CLR), and Marathon Oil (MRO). They also impact oil and gas ETFs like the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) and the Select Sector SPDR Fund ETF (XLE).

OPEC’s largest crude oil producer is Saudi Arabia. It produced 10.3 MMbpd in May 2015. It produced 9.7 MMbpd in 2014. Citigroup estimates that Saudi Arabia could produce 11 MMbpd in 2H15. That means a rise of 700,000 bpd (barrels per day). OPEC’s spare production capacity is 1.8–2.2 MMbbls.

Likewise, Iran’s production could rise by 700,000 bpd to 1 MMbpd within six months of lifting the oil sanctions. In April 2015, Iran produced 2.87 MMbpd, according to Bloomberg surveys. Iran also has 30–40 MMbbls in storage, according to market surveys.

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These huge oil stocks could be sold immediately if the oil sanctions are lifted. Unclear cues of Iran’s nuclear deal could delay lifting the oil sanctions. This will support the oil market in the short term. Over the long term, massive production from OPEC and Iran will continue to put pressure on the crude oil market. Crude oil’s production cost from Iran is $5–$10 per barrel, according to Platts’ estimates. Iran’s strategic location also adds a good value proposition for crude oil importers.

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