OPEC: Effectiveness in question

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With Angola leaving the oil organization, the question being raised is about the effectiveness of OPEC in supporting the oil prices. Angola is not a major oil producer as it produces around 1.1 million barrels per day. It is aware that it cannot serve the purpose behind the frequent request for production cuts in its daily throughput, due to which it decided that it was better off being out of the oil group.

This leads us to the current level of oil prices and shows us how true the reflection of its true value is. It could be based on the current geopolitical situation of the recent attacks and the disruption of ships moving through the Suez Canal. Oil currently stands at $80 per barrel, due mainly to attacks on ships, without any reference to the oil fundamentals of supply and demand. Oil supply is more adequate with OPEC+ producing 2.6 million barrels less, as group voluntary cuts are aimed to boost oil prices to the upper range of $80.

The increase of oil supply from non-OPEC producers is causing a nightmare for the organization. It will certainly weaken the oil price and bring it down to $75 level in the coming months. The huge volume that will be pouring into the market from the USA, Canada, Brazil, and Norway will be here to stay, particularly with the surprising production of Brazil that will challenge the production of Kuwait. Iran and Iraq, and is expected to hit 4.5 million barrels per day. Considering the circumstances of the oil market today, Angola is concerned about being an effective OPEC member, as the organization is helpless in defending a certain price level for oil and is opting the production-cuts mechanism to stabilize the oil prices further.

Meanwhile, Brazil is seeking membership in the same organization but its arrival will be followed by asking it to reduce its production and recover the cost of its investments. The question that is being asked by the newcomer is regarding the price level that OPEC+ is happy with, or the pricing criteria, besides its main purpose of stabilizing supply along with its oil prices. Why for instance non-OPEC countries are producing without being bothered about the price level and making mountains of cash, while OPEC+ does not seem to be satisfied and is constantly seeking high prices for the same barrel? The reduction by OPEC+ is not that effective nowadays with the volumes coming from all over particularly from its members like Iran and Venezuela which are hungry for additional income after years of boycott and decline in production.

The question is regarding the effectiveness of OPEC. If it had not reduced its volume by 2.6 million barrels per day, how low would the oil prices have gone? Would the other producers continue to have reduced production? OPEC’s effectiveness will be real the moment its members search and find other sources of income to rely on. Without an alternative, OPEC will not be that influential and effective in serving its members. In conclusion, I would like to wish everyone a Merry Christmas and a Happy New Year.

By Kamel Al-Harami
Independent Oil Analyst

Email: [email protected]

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