OPEC’s crude oil reserves
OPEC (Organization of the Petroleum Exporting Countries) member nations operate as a cartel. The OPEC member nations are Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates, and Venezuela. These countries control 40% of global crude oil production and have around 81% of global crude oil reserves, as of 2014.
The largest of the crude oil reserves are held by Venezuela, Saudi Arabia, Iran, and Iraq. There is consensus of rising production from Saudi Arabia, Iran, and Iraq in 2016. The massive crude oil reserves give OPEC countries a cushion for record production. OPEC members also have lower break-even and production costs than the United States and Russia.
OPEC’s spare production capacity
The massive crude oil reserves and rising production capacity give OPEC members an advantage in that they can scale up production to meet demand or manipulate oil prices by increasing or decreasing production. Whenever OPEC’s production capacity is high and OPEC’s intentions are to produce more, there is a good chance of oil prices falling.
OPEC’s production capacity is expected to average 2 MMbpd (million barrels per day) in 2016. The consensus of rising production capacity will continue to put pressure on the crude oil market. Iran is expected to scale up production by 0.5 MMbpd to 1 MMbpd in 2016. Currently, the oil market has an excess supply of 2 MMbpd, and the global inventory is at 3 billion barrels. Thus, Iran’s increase in production will put more pressure on the oil market.
Volatility in the oil market will continue to affect oil producers such as Saudi Aramco, Royal Dutch Shell (RDS.A), Eni (ENI), BP (BP), Total (TOT), and Gazprom (OGZPY). ETFs such as the First Trust Energy AlphaDEX Fund (FXN), the United States Oil Fund LP (USO), and the iShares US Oil Equipment & Services ETF (IEZ) are also affected by uncertainty in the energy market.
Demand also plays a vital role in balancing the oil market. We’ll look at demand drivers in the next part of this series.