Oil in 2016

Could the next year finally belong to the OPEC?

The OPEC meeting last week virtually gave a free hand to the OPEC members to increase their output. Contrary to expectations of an output cut proposal by Saudi Arabia, the OPEC was actually permitted to pump more oil. One argument can be that with just about 33% market share, OPEC has limited influence on oil supply and prices. But more importantly, this also helps the OPEC achieve its long term goal of making oil extraction unviable in most of the developed world.

Non OPEC output likely to fall…

 The good news for the OPEC is that the non-OPEC output is likely to fall by almost 380,000 per day during 2016. Across the US, Canada and Europe, oil extractors are finding it difficult to keep on extracting oil at current prices that are almost non-remunerative. It makes sense for these nations to cut their production and at least ensure that their costs are in control. Had the OPEC done that and curtailed supply, the prices of crude would have gone up. That would have made a lot of shale wells across the US and Canada profitable and the supply that was curtailed by the OPEC would be filled by the non-OPEC nations. But by keeping supply flowing, the OPEC has ensured that oil producers across the US, Canada and Europe will be forced to cut their output and automatically bring about a balance between demand and supply in the global oil market.

OPEC gets time to build alliances…

Remember, the Middle East members of OPEC themselves do not have the luxury of too much time at their disposal. The wealthy Kingdom of Saudi Arabia has already burnt $100 billion of reserves trying to cover its budget deficit. The remaining $640 billion of forex reserves would be just about sufficient to cover Saudi Arabia for the next 3-4 years. The situation in other Middle East nations is a lot more precarious. So what is the OPEC trying to do?

Saudi Arabia by itself is not the world’s leading oil producer. The US is much bigger and Russia produces almost as much oil as Saudi Arabia does. Now Saudi Arabia needs the backing of other Middle East and West Asian nations like Iran, Iraq, UAE, Kuwait, Oman and the African nations to present a combined front against the might of the US. Additionally, the OPEC will also be keen to solicit the support of Russia on supply cooperation as a combination of Russia and the OPEC will be in a better position to dictate oil prices.

So the OPEC buys time to build alliances and to push the Western producers further to the wall. If they succeed then 2016 will surely belong to the OPEC in general and the Kingdom of Saudi Arabia in particular. The OPEC may have finally won phase 1 of the battle over oil. Of course the bigger challenge of limiting emissions still remains! ©

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