The power OPEC once held in the oil market has now dissipated as it no longer holds the role of being the swing producer since the U.S. ramped up their production.
OPEC’s effect on the prices of Brent and WTI crude oil is less pronounced compared to a decade ago, said Patrick DeHaan, a senior petroleum analyst for GasBuddy.com, a Boston-based provider of retail fuel pricing information and data.
“OPEC absolutely does still have power, but far less than 10 years ago,” he said.
Nowadays, the strength of OPEC can be calculated by the strength of U.S. relationships with non-OPEC members.
“It's no mystery that U.S. and Russia ties are strained. Russia has little incentive to go against OPEC's oil production cut that took effect to start 2017,” DeHaan said. “However, OPEC’s previously unabated control of oil markets ended with a major gaffe—allowing oil prices to rise unchecked to $150/bbl, which pushed oil companies to invest in other forms of drilling and into fracking.”
The game has changed because of newer, more efficient technology and while OPEC's power is diminished, it still wields some measure of control.
Since OPEC reigned in oversupply, oil prices rebounded and doubled from their 2016 low.
“Oil is now sitting at $65 and global inventories have drained some of the excess, all because OPEC's initiative,” DeHaan said.
The largest difference between a decade ago is that the ceiling for oil prices has been set in concrete and that is the result of the production of U.S. shale, DeHaan said.
“Oil prices will likely be stuck, range-bound between $55 and $70/bbl (WTI) until a policy change,” he said. “Whether that policy change is a result of OPEC meeting or a major change in supply/demand is yet to be seen. But at the foundation, OPEC is strong, while being weaker now than in years past.”
While OPEC’s power has diminished in recent years, its influence over both OPEC and non-OPEC countries remains strong, said Bruce Bullock, director of the Maguire Energy Institute at Southern Methodist University's Cox School of Business in Dallas.
OPEC’s 2017 report said 81.5% of the world's proven crude oil reserves are located in its 13 member countries—65.5% of it coming from the Middle East.
OPEC’s production cuts have not stymied U.S. producers who have “found ways to negate their impact at almost every turn,” he said. “If they withhold production from the market, the U.S. produces more and captures additional market share.”
If OPEC tries to produce more, U.S. producers have found ways to adapt through technology and productivity, “prolonging the revenue hardship on the OPEC countries,” Bullock said.
The stock markets do watch OPEC and their production quotas because it can impact the psychology of the market more than the actual supply and demand balance.
“In future meetings, I would anticipate OPEC maintaining its current output quotas,” he said. “Saudi Arabia has a lot at stake in maintaining stable crude markets if it wants to proceed with an IPO of Aramco.”
OPEC still has tremendous power, even as most countries are producing about as much oil as they can, said Patrick Morris, CEO of New York-based HAGIN Investment Management.
Russia and Saudi Arabia have the control over the majority of the excess production capacity or 90% of the marginal, economically viable supply, he said.
“The ability of Saudi to hold this production cut together is a combination of a new alliance of petroleum producers that effectively includes Russia and a more persistent resolve than we have seen in the past,” Morris said. “As long as Saudi holds production cuts, the oil price will remain above $65.”
One looming issue is that Russia, Saudi Arabia, Venezuela and Nigeria have “built their entire economy” around oil prices to be in the $70-$100 or more range.
“It’s not strength, but necessity that is forcing their hand,” Morris said.
OPEC remains an important entity since the cartel supplies over one-third of the global oil supply, said Rob Thummel, a portfolio manager with Tortoise Capital in Leawood, Kan.
In the future, OPEC will focus on global oil inventories and keeping them in line with historical average and is no longer focused on increasing market share.
“Instead, OPEC is focused on economics,” he said. “For instance, Saudi Arabia cut production by 500,000 barrels per day in 2017, yet daily oil revenues increased by $90 million per day.”
Recommended Reading
US Raises Crude Production Growth Forecast for 2024
2024-03-12 - U.S. crude oil production will rise by 260,000 bbl/d to 13.19 MMbbl/d this year, the EIA said in its Short-Term Energy Outlook.
Exxon Versus Chevron: The Fight for Hess’ 30% Guyana Interest
2024-03-04 - Chevron's plan to buy Hess Corp. and assume a 30% foothold in Guyana has been complicated by Exxon Mobil and CNOOC's claims that they have the right of first refusal for the interest.
Petrobras to Step Up Exploration with $7.5B in Capex, CEO Says
2024-03-26 - Petrobras CEO Jean Paul Prates said the company is considering exploration opportunities from the Equatorial margin of South America to West Africa.
The OGInterview: How do Woodside's Growth Projects Fit into its Portfolio?
2024-04-01 - Woodside Energy CEO Meg O'Neill discusses the company's current growth projects across the globe and the impact they will have on the company's future with Hart Energy's Pietro Pitts.
Tech Trends: Halliburton’s Carbon Capturing Cement Solution
2024-02-20 - Halliburton’s new CorrosaLock cement solution provides chemical resistance to CO2 and minimizes the impact of cyclic loading on the cement barrier.