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How Are Oil Prices Squeezing OPEC Members’ Budgets?

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OPEC members 

In the previous part of this series, we discussed how the global oil inventory is putting pressure on oil prices. Let’s see how oil prices are affecting major oil producers. OPEC (Organization of Petroleum Exporting Countries) is under immense pressure due to the lower oil prices, because oil is the major source of revenue for OPEC countries. Oil prices have fallen more than 60% since June 2014, which affects the revenue of OPEC countries. Low revenues mean low income for the government. OPEC members need more money to balance the ever-growing expenses and development.

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Solution 

OPEC member nations can curb their spending, issue government bonds, and use their cash reserves. OPEC kingpin Saudi Arabia is expected to have a budget deficit of $100 billion due to the lower oil prices. Saudi Arabia is relying on the long-term strategy of holding production at record levels, keeping business away from high-cost US shale operators such as EOG Resources (EOG), Apache (APA), Whiting Petroleum (WLL), and Continental Resources (CLR). Countries such as the United Arab Emirates and Qatar are in better financial positions due to their lower break-even costs, production costs, and high cash reserves. OPEC members Venezuela, Angola, and Algeria are the worst affected due to their heavy debts and lower revenues.

Consequences 

Lower oil prices could challenge the operational sustainability of oil companies in this environment. OPEC members’ lower break-even costs, production costs, and high reserves will push them to seek strategic ventures with western oil giants such as Royal Dutch Shell (RDS.A), Eni (ENI), Total (TOT), Chevron (CVX), and BP (BP). Iran is luring cash-rich oil giants to invest and produce in Iran with long-term contracts and other perks.

The roller coaster ride for crude oil prices is nothing new, and this period of stress on the energy market will likely pass. Technological innovation and strategic planning and decision making will be the talk of the hour for most energy players. Therefore, investors can find value in a portfolio with a combination of refining, oil production, and oil tanker stocks.

ETFs such as the iShares US Oil Equipment & Services ETF (IEZ), the Vanguard Energy ETF (VDE), and the First Trust Energy AlphaDEX ETF (FXN) are also influenced by the volatility of oil prices.

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