OPEC is dead – BBH

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Dec 9, 2015.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    FXStreet (Delhi) – Research Team at BBH, notes that many observers conclude OPEC is dead. Oh, its demise has been claimed before, but after the oil cartel failed to provide a quota (output goal) in last week's statement, the claim has been given new life.

    Key Quotes

    The problem is that OPEC's action under Saudi leadership may be perfectly rational for a cartel. The Prince is concerned that many OPEC and non-OPEC producers increased their output and expected the Prince to bear the burden and cut output. The loss of control of the oil market costs money, prestige, and if allowed to persist, would challenge the lifestyle and strategic role of the kingdom.

    Saudi Arabia is insisting on similar tactics. Many OPEC countries have had to go along with Saudi Arabia because they smaller producers. Many observers seem confused. They see the lower price of oil as a failure of the Saudi strategy. It signals some say, the end of OPEC. What they miss is that through a decline in prices the cartel seeks to re-establish its control. The drop in oil prices will reduce some supply. Non-OPEC output is expected to fall next year. It likely would not have if Saudi Arabia continued its previous strategy of acting as a swing producer.

    This is not the first time the Saudi Arabia has rejected the role as a swing producer. It is not the first time oil prices have sold off in response. While some see the arms race as having toppled the Soviet Union, others suggest it was Saudi Arabia that boost in oil output. The price of oil fell to near $10 a barrel in the mid-1980s. This, so the argument goes, created the strains that eventually toppled that regime.

    Saudi Arabia is pursuing a grand strategy. While come countries and producers are trying to maximize current revenue, Saudi Arabia is trying to preserve the value of its vast wealth that is still mostly in the ground. It is trying to shape the global energy dynamics for years to come. How fast the world can move away from the carbon standard is partly a function of prices, which act as incentives for other oil producers as well as the development of alternatives.

    This leads us to conclude that developments in the oil market, both within OPEC and outside of it, has not been a significant surprise to Saudi officials. Investment in the sector is drying up. Global demand is increasing. If high-cost non-OPEC producers continue to be squeezed, and output falls a little and world demand continues to grow, perhaps the OPEC meeting this time next year will produce a different outcome.

    There are two types of errors one can make. One can assume that the oil cartel has collapsed, and it hasn't. Or one can assume that the cartel has not collapsed, and it has. The former error seems more costly from an investment point of view. The latter is consistent with the strategic principle of not under-estimating one's adversary.”
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