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Smaller OPEC members object Saudi’s oil policy, calls for output cut

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Nov 24, 2015.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

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    FXStreet (Mumbai) - The crash in oil prices has left the smaller OPEC countries disgruntled, leading them to oppose Saudi Arabia which has been refusing to revert from its policy of recovering market share to its old of defending oil prices by cutting output. The smaller producers lie Venezuela and Algeria want OPEC to halt their policy on production so that oil prices and in turn their export dependent economies can be boosted.

    Smaller oil producers suffer as Saudis continue to defend market share

    Saudi Arabia, till ten years back was the world's largest oil producing nation. However with the shale gas revolution the American production of oil increased markedly and currently the U.S. produces nearly as much as Saudi Arabia. Saudi Arabia’s objective now is thus to push American shale oil producers out of the game and regain market share previously lost to the U.S.

    With this objective in mind the oil rich nation. decided to mark a shift in its oil policy- to defend market share rather than cut output to prop up prices as they had for years. The kingdom swiftly abandoned its policy of reducing supplies to stabilize price. The shift became public when OPEC in November 2014 refused to cut supplies despite falling prices.

    The over-supply played havoc on the oil price and the collapse in oil prices soon began to hurt less affluent OPEC members like Algeria, Angola, Ecuador, Nigeria and Venezuela. According to the International Energy Agency, the plunge in oil prices since June 2014 has slashed OPEC revenue by nearly $500 billion a year.

    These nations have stressed on the need for Saudi Arabia to mark a shift in strategy but so far they have not been successful in convincing the OPEC to cut production.

    Nigeria's former central bank governor Muhammad Sanusi II is of the opinion that Saudi Arabia's decision to flood world markets with oil is a mistake. Venezuela's oil minister warned that oil price could touch as low as $25 if OPEC does not decide on output fast, while Algeria has called for a price floor. Ecuador's oil minister reiterated that the only way strike a balance is to cut production.

    Saudi Arabia says can cooperate with oil producing countries

    Saudi Arabia's official news agency on Monday reported that the country is ready to "cooperate with all oil producing and exporting countries." The comments, however did not throw light on the kingdom’s willingness to cut output. The statement came in just as oil held barely above 2-1/2-month lows. The market share strategy championed by Saudi Arabia has caused OPEC to suffer considerably with respect to revenue.

    Saudi Arabia as well as the other big OPEC producers has had in the past made similar pledges of supporting oil market but in reality they have not budged from their oil policy.

    Saudi Arabia has been refusing to cut back on production fearing that by doing so they will give away more market share to the U.S., Russia and rival OPEC countries.

    OPEC unlikely to decide on output cut at its December meeting

    OPEC members are gathering in Vienna on December 4 to decide on output. OPEC has repeatedly urged non-member producers such as Russia to join it in cutting supply to reduce a glut. Non-OPEC countries have so far refused. Thus OPEC has also declined to cut output.

    A Saudi ministerial source told CNN that Saudi Arabia will shift from its market share strategy if Russia continues to produce nearly 11 million barrels per day; if Mexico is not part of the non-OPEC equation; and if Iraq refuses to live by an OPEC quota. Saudi Arabia’s rich neighbors like Qatar, Kuwait and the United Arab Emirates who can also withstand cheap oil price, supports the strategy to increase market share without a concern for price fall.

    At the December meeting too, OPEC will likely stick to the no-cut policy if major non-OPEC producers are unwilling to support the policy of cutting production to boost prices.
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