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Saturday, October 22, 2016

Saudi Arabia’s changing role OPEC

Created decades ago, the organization of oil exporters – OPEC, it seems that substantially changes its purpose. Its original purpose – the regulation of prices of oil by regulating production – no longer works. The reason for that was the actions of Saudi Arabia, learned the lesson from the oil crisis of the 1980-ies. What are the main factors now affect the price of oil?

Minister of energy of Saudi Arabia Khalid al-falih told about a possible change to the role of OPEC in the oil market and its departure from traditional regulation by limiting the production level, writes NYT. Oil producers should let the market set a fair price for oil, and the last model of the impact of OPEC on the market may not go back, the Minister added.

“Oil exporters was going to RUB their hands in satisfaction: the strategy of displacement of U.S. senseview works, and there are no restrictions in production

OPEC was created in order to support oil prices via “manual” control of supply and demand. Given that the cartel has 80% of the world’s proved crude oil and produces 40% of oil in the world, he is more than capable. Importantly, only the cartel has a significant level of spare production capacities, which allows you to manage the prices. But for the third year defiantly refuses to OPEC affect oil prices. Either in November 2014 or June and December of 2015 or in April 2016, nor the day before (when the regular meeting) OPEC has not taken a decision on the reduction of production volumes – decline of level of quotas.

Thus a cartel in breach of article 2 of the OPEC Statute, which stipulates the obligation of the cartel to secure stable oil prices. This is what the quota system. However, the members of the organization stopped paying attention to the quota and has long been mined more than they themselves have prescribed. All this raised the question, and whether OPEC is able to maintain in the future its function of price cartel, to have any important impact on the market?

So far OPEC has not formally declared the abolition of the quota mechanism. The statement of energy Minister of Saudi Arabia was the first. Essentially, this means that the Saudis want to bury the organization – or at least seriously change its role. What is the reason?

All this time Saudi Arabia is almost single-handedly regulated market. Only she has a serious volume of free production capacities, sufficient to balance the market. As a rule, the Saudis successfully coped with its task. However, there were exceptions. And the last such mistake is too costly to Saudi Arabia. During the crisis of overproduction in the 80’s the Saudis to stabilize prices has reduced production more than tripled – from 10 million barrels per day in 1980 to 3 million barrels in 1985. However, it did not return prices to pre-crisis levels, while Saudi Arabia lost their main markets, which are occupied by other manufacturers. To regain lost ground, the Saudis took 10 years.

Here this error and are afraid to repeat the Saudis. Indeed, many experts now point out that us shale producers have managed to reduce the level of its projects up to $ 50 per barrel. This means that their production will go up again as soon as oil prices stabiliziruemost at this level and above. It turns out that Saudi Arabia is afraid to cut production and are ready to bury OPEC because of the American shale threat.

“Countries – oil exporters, it seemed, was going just to RUB their hands in satisfaction, saying that the strategy of displacement of U.S. kancevica. And therefore do not need any constraints in production,” writes mark Goikhman from TeleTrade.

“OPEC meetings have become a formality – no key decisions that can affect the market, the cartel has to take, apparently, no longer able,” – said the Chairman of the Board of Directors of Engineering company “2K” Ivan Andrievsky.

OPEC believes that his main weapon now is just the same inaction. “I think that OPEC as a group reacts, said Khalid al-falih in an interview with the independent international price Agency Argus Media. – If you look at the last two years, OPEC has increased production and market share by nearly 2 million barrels a day, and for the first time in a long time, we saw the decline in production from producers outside OPEC: shale oil, production of oil in the deep seas, and even in Mexico and in the North sea. Shale oil experienced the biggest decline, especially when compared with how she grew up until 2014”. This suggests that the OPEC strategy works, and in the long run it will pay off: prices will come to a healthy level, puts the Saudi Minister.The world’s largest exporters and consumers of oil and the countries that are its largest proven reserves

To the forefront fundamental factor of influence on oil prices – the balance of supply and demand. Also at any time can drive a wedge factors such as war, politics or force majeure, as, for example, the recent rise in prices due to the disruption of oil supplies from Canada and Nigeria.

The oil market has become faster and faster to forget the failure of the next meeting of OPEC. He have nothing to expect from the cartel. This was also shown in the past on the eve of the OPEC meeting. The market, despite the failure of the meeting, on Friday, showing stability. Brent for the first time since the end of last year were worth close above $ 50 on Friday and continues to hold this level. Among the bidders is still dominated by positive expectations, most investors believe that the worst for the market is behind us.

For the market was decisive statistics of the United States. Oil inventories declined last week by 1.37 million barrels, reported the US Department of energy. Oil production in the U.S. last week fell by 0.36%, or by 32 thousand barrels per day – up to 8,735 million barrels per day.

“In our view, despite the fact that OPEC has once again cannot reach consensus, from a fundamental point of view, the oil market is not expected to have a negative impact. Moreover, in our forecasts we expect that the market will find its equilibrium by the end of this year,” says chief analyst at Promsvyazbank Ekaterina Krylova.

In other words, a surplus of oil this year will seriously be reduced. This happens, firstly, by reducing oil production in the United States, leads to one of the reasons for Krylov. Secondly, OPEC will increase though, but still will hold back oil production, it will grow to a maximum of 33.3 million barrels per day from the current 32.5 million

On the other hand, Asian countries, especially India, are increasing their oil consumption. “As a result, we expect the average for the year, the supply of oil will be $ 96 million barrels./day demand – 95,14 million barrels./day,” notes the analyst of Promsvyazbank.

According to the forecast of the PSB, in the second quarter of 2016 the average price of oil will be at the level of 48-50 dollars per barrel. Valery Polkhovsky from Forex Club does not exclude the possibility that Brent may reach $ 53.

However, the stabilization of oil prices can be misleading, said Vice-President of the research centre for energy and environment at the University of North Dakota John Harju. He does not exclude that the supply may soon exceed demand and, therefore, the market can wait for a new serious shock.

Mark goykhman also fears such a scenario. “Prices above 50 will return over time, many of kancevica on the market. At least stopped reducing the number of drilling rigs. So we continue to entertain the possibility in the near future another round of lower prices, with past intermediate goals of 48.7 per dollar”, – the expert explains.

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