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Is OPEC’s Control Over Oil Running On Fumes?

OPEC has always served as the textbook cartel and its members account for about 40% of the oil we use every day. This has given them significant influence over not only prices but the global economy. After, all it’s not just about the oil we put in our heaters or our cars.

 

Courtesy of https://oilprice.com

 

Here’s a brief list of things you may not have known were made from oil but directly or indirectly affect you:

> Toothbrushes

> Pillows

> Golf Balls

> Cameras

> Guitar Strings

> Paint

> Eyeglasses

> Trash Bags

 

The list goes on, but you get the picture. Unfortunately, you can rest assured that if oil prices go up, then so will the price of most of these items and many more, weighing on households and people’s disposable income. OPEC, in its 50 years of existence, has had to fight off many challenges inclusive of new technology and non-member competition. For the most part, they’ve been successful, but OPEC is really up against the ropes now, as it seems the U.S is not cutting back on production as agreed. Having laid this down let’s look at what’s currently happening in the industry.

 

Oil prices are at a serious risk of falling under the critical $60 benchmark as U.S output has not only NOT lessened but increased! There’s U.S oil basically headed all over Asia which is seriously threatening to undermine OPEC’s and its allies’ attempts to keep prices afloat. The world has begun embracing renewable energy and abandoning classic oil. In an attempt to boost oil prices, in November 2016, OPEC and some non-OPEC members agreed to cut output.

 

This strategy has worked in the past but that’s because everyone kept their word and actually cut their production to reduce the supply glut. The real question is, with the U.S continually increasing their output can OPEC keep prices afloat?

 

But then come to think about it, another important factor comes into play. What about the compliant nations? What if everyone decides, “you know what, if the U.S won’t comply, neither will I.” Well, looking back at historical data, oil’s 40% rally since June 2017 could be canceled out and we could go back to square one – supply glut and dirt-cheap prices according to commodities strategist at Dutch Bank, Warren Patterson.

 

He added that “the longer the deal goes on, it’s going to start falling apart,” referring to the production cut agreement between OPEC and other non-OPEC members, including the superpower Russia. What needs to be noted here is that, yes although renewable energy has come into play, people are always looking to buy oil and if OPEC won’t sell it to them, someone else will. Mr. Patterson agrees, saying that OPEC continues to give a significant “market share away to the U.S.”

 

It was probably the brief rebound in prices that encouraged U.S producers to increase their output and Patterson believes that “we need to see prices in the short-term trade below $60 to reduce that incentive for U.S. producers.” The U.S is currently pumping over 10 million barrels every day, breaking their own record set in 1970. Averaging about 1.5 million barrels the past six months, the US has almost doubled its exports, according to data from the Energy Information Administration (EIA).

 

OPEC should probably try and claim some of the U.S’ territory and get a bigger slice of that Asian-pie. From seeing $70 per barrel as the new benchmark to trying to keep prices above the critical $60 level.

 

Stay tuned as the oil saga unfolds.

 

 

Disclaimer:
This article is for educational and informative purposes only and should not be considered as investment or trading advice.

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