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Will OPEC Initiate a Big Crude Oil Market Rally?

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OPEC production 

The preliminary survey from Bloomberg suggests that OPEC’s (Organization of the Petroleum Exporting Countries) crude oil production rose slightly by 74,000 bpd (barrels per day) to 32.2 MMbpd (million barrels per day) in October 2015—compared to September 2015. The rising production will weigh on the crude oil market. In contrast, Reuter’s surveys suggest that OPEC’s production fell slightly by 200,000 bpd to 31.6 MMbpd in October 2015—compared to 31.8 MMbpd in September 2015. Saudi Arabia and Iran contributed to the fall in production due to the refinery maintenance season.

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OPEC’s strategy 

OPEC’s member nations continued their record production to defend their market share and offset lower crude oil prices. However, 16 months of collateral damage in crude oil prices led to internal conflict among the member nations. Some member nations feel that the production quota system for each member nation should be resumed. The member nations also think that OPEC needs to cut back its production levels to boost oil prices. Otherwise, it must introduce oil price bands. However, Saudi Arabia—OPEC’s kingpin—thinks that oil markets could only bring price equilibrium. OPEC’s role as a swing producer is limited due to record production from Russia and the US. The only option left is market forces driving crude oil prices to a new era of lower prices. The next OPEC meeting is scheduled for December 4, 2015. It will give more cues about OPEC’s strategy.

Meanwhile, the US production has slowed down due to lower crude oil prices. The high-cost shale oil producers like EOG Resources (EOG), Continental Resources (CLR), Laredo Petroleum (LPI), and Whiting Petroleum (WLL) could have idled their high-cost wells due to lower crude oil prices. However, slowing US production will be negated by weak demand, rising production from Iran, and slowing demand from China. The uncertainty in the oil market also impacts ETFs like the iShares US Oil Equipment & Services ETF (IEZ) and the PowerShares DWA Energy Momentum ETF (PXI).

In the next part of this series, we’ll discuss the trend in crude oil prices.

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