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OPEC Could Lose Its Shine: It Isn’t Ready for a Production Cut

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OPEC could lose its shine

Any production cut from OPEC (Organization of the Petroleum Exporting Countries) could give US (SPY) shale oil producers a chance to capture more market share. Also, a production cut could infuse a rally in crude oil prices. Shale oil producers would benefit from the situation. If OPEC goes for a production cut, it could spoil its strategy to overthrow US shale producers. OPEC countries recognize the need to diversify their economy. They want to maximize their revenue from crude oil. Saudi Arabia and Iran want economic diversification. Experts think that OPEC countries like Saudi Arabia, Iran, and Iraq are sensing reduced demand for crude oil in the future. They can’t afford to keep high reserves when the demand is lower.

The above graph shows the fiscal deficit of different OPEC nations with crude at $45. As of February 3, March crude futures were around $32.28.

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The market share war initiated by OPEC against US shale oil producers caused crude oil prices to fall. Since 2014, OPEC started to oversupply the crude oil market in order to financially kill the shale producers. According to OPEC’s strategy, crude fell below the break-even point for shale oil producers. OPEC countries faced a high fiscal deficit to fight the price war.

Upstream players like Apache (APA), Hess (HES), Denbury Resources (DNR), and Marathon Oil (MRO) fell by more than 50% from their highs in 2014.

In the next part, we’ll discuss how the Syrian peace talks impact the production cut discussion.

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