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How Relevant is OPEC Today?

July 1, 2020 | Commentary

  • The oil market is generally volatile, but the first half of 2020 has seen extremes.  A mixture of controlled national producers and free market participants has created a combustible environment that should give any market participant pause.
  • Part of this volatility stems from the sharp reversal in the 40-year downward trend of U.S. oil production in the last decade.  On the back of fracking technology, the U.S. has passed Saudi Arabia to become the world’s largest producer.
  • In April, Saudi Arabia and Russia brokered a broad agreement across OPEC+ countries (the official OPEC members and other sympathetic oil exporters) to cut almost 10 million barrels of production a day.  These cuts along with the swift decline in North American output due to low prices has helped to restore better supply and demand balance.
  • The one universal across OPEC+ is that the producers are state controlled enterprises.  This group commands over half of the world’s production and 90% of the known oil reserves. They sometimes work in partnership with global private corporations, but the major decisions are made by the home country’s governments, not always driven by normal business economics.
  • Seeing how quickly the market responded to the OPEC+ supply cuts is a reminder that the organization is still highly relevant, at least in the short run.  Its continued relevance in the coming years may face many challenges.  Ascendant market driven producers will continue to take advantage of any prices above the all-in cost to boost production.  OPEC should also be wary of the spread of fracking technology globally that will further lower costs and reduce the incentive for any one country to participate in the cartel. 

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