OPEC disregards glut worry, maintains policy of pumping record volumes

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Dec 4, 2015.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    FXStreet (Mumbai) - At its meeting today in Vienna, OPEC maintained its policy of pumping near-record volumes of oil further adding to the already existing glut that has caused oil price to slum in the last one year. The group decided to increase its collective output ceiling to 31.5 million barrels per day (bpd) from the previous 30 million. Clearly, the decision did nothing to attend the growing supply side concern.

    Prior to the meeting OPEC had said it would cut output only if other non-OPEC nations followed suit. The non OPEC countries had shown no such interest. As a result, it was largely expected that OPEC would stick to its policy of drilling record volumes to maintain market share.

    Why OPEC could not decide to cut output?

    International Energy Agency said the oil price plunge since June 2014 that has reduced OPEC revenue by nearly $500 billion a year is the result of excessive pumping. The loss in revenue was hurting the less opulent OPEC members whose export income was being hurt by declining prices. These poorer countries had created pressure on wealthier OPEC members, led by Saudi Arabia, to lower output. Saudi Arabia has refused to budge. Riyadh and its Gulf allies are of the opinion that lower prices would ultimately drive higher cost U.S. shale producers out of the market.

    Saudi Arabia’s oil minister Ali al-Naimi had said that he would listen to others members before taking a call on output. A Gulf official admitted that Saudi Arabia saw the need to curb supplies. He however exclaimed “We cannot cut alone”. Saudis said they would consider cutting production only if OPEC members Iraq and Iran also agreed to tread the same line and non-OPEC members such as Russia joined in.

    Iranian oil minister Bijan Zangeneh said Iran would consider slashing output only when it reached full output levels post removal of sanctions. Iraq also showed no intention to cut. Iraqi oil minister Adel Abdel Mahdi went a step ahead and declared his country’s intention to further raise output in 2016 after having already increased production steeply in 2015. Moscow on the other hand said this week it saw no chance of joint action.

    The decision to cut output thus could not be reached at. Saudi oil minister hopes rise in demand can absorb the jump in production in 2016.

    Impact on oil

    OPEC’s decision rendered a blow to oil price. Benchmark Brent oil futures, which are near a six-year low further lost nearly US$2 on the news. It fell 2 per cent to below US$43 a barrel by 1420 GMT.
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