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Why OPEC Isn’t in the Mood to Cut Production

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Sep. 28 2015, Updated 2:07 p.m. ET

OPEC production 

OPEC (Organization of Petroleum Exporting Countries) released its MOMR (Monthly Oil Market Report) on September 14, 2015. The data showed that OPEC’s production rose by 13,000 bpd to 31.54 MMbpd (million barrels per day) in August 2015—compared to July 2015. OPEC also estimates that the global surplus of 1.23 MMbpd of crude oil will continue in 2016 despite the recent fall in production.

Saudi Arabia produced 10.27 MMbpd of crude oil in August 2015. Iraq’s production rose by 42,000 bpd (barrels per day) in August compared to the production of 3.76 MMbpd in July. Likewise, Iran’s crude oil production rose by 50,000 bpd to 3.18 MMbpd in August 2015. The rising OPEC production will continue to put pressure on the crude oil market.

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Inventory

The rising production and slowing demand could increase the crude oil inventory. The JODI (Joint Organizations Data Initiative) reported that the Saudi Arabian crude oil stockpile hit record levels in July 2015 to 320 MMbbls (million barrels). Saudi Arabia is OPEC’s largest crude oil producer. The EIA (U.S. Energy Information Administration) projects that the global crude inventory was at 2.9 MMbpd in 2Q15—compared to 1.9 MMbpd in 1Q15.

The slowing US production could narrow the supply and demand gap in the surplus oil market. However, speculation of rising crude oil production from Iran, due to the easing of western oil sanctions, could balance it. The record inventory from Saudi Arabia to the US will also put pressure on the crude oil market.

Impact

The long-term lower crude oil prices will impact the high-cost US shale producers more than OPEC’s producers. Some of the US upstream players like EOG Resources (EOG), Anadarko Petroleum (APC), and ConocoPhillips (COP) will be impacted the most. These companies account for 9.61% of the Energy Select Sector SPDR ETF (XLE). These stocks’ crude oil output mix is greater than 41% of their total production. The falling crude oil prices also impact ETFs like the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) and XLE.

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