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Oil Prices are Lurking in Uncertainty.

Balancing the budgets for OPEC members will divide the vote on pricing oil at current prices.
Maintaining market share will tend to further lower the prices.
A cut in supply by the OPEC will stabilize prices, benefitting the overall oil sector.
Maintaining supply will benefit OPEC, but not the investors.

As the 12 members of OPEC are expected to meet on the 27th of this month, what is to become of the oil
prices remains a mystery. With bulls and bears on oil futures advocating their sides of the story, it
becomes even more confusing as to identify the actual factors governing the supply and demand. This
must be, though, kept clear in mind that both supply and demand whether artificially or inherently
created will have impact on the price of oil.
In this article, Ill be discussing some of the mainstream reasons that OPEC will consider while deciding
about reducing its supply. Furthermore, Ill discuss the impacts of both possibilities i.e. reduction in
supply or reduction in price.
Balancing the Budgets for OPEC Members will tend to Increase Price:
With Iran and Iraq, two of the main oil producers for OPEC, needing oil price to surge to about $100 to
balance their budgets, it will be difficult to draw consensus among OPEC members to further cut oil
prices. Similarly Algeria needs approximately the same level of price to balance its budget. Considering
this perspective, it is difficult to assume a unanimous decision coming out of the OPEC meeting.
An Inclination to Maintain Market Share by OPEC will tend to further Decrease the Price:
Here, the cartel will face a tradeoff between asserting its power on influencing price or the volume of
sales. If the OPEC chooses to maintain its market share, it will have to increase oil supply at the expense
of prices. On the other hand, if it chooses to stabilize the prices, it will have to cut its oil production
supply. Among the OPEC members, Libya is of the view that OPEC should reduce its oil supply whereas
Kuwait deems this idea as not pragmatic. Kuwait expects the oil supply to remain at the current levels,
with market absorbing the additional supply and balancing oil prices all along. Both possibilities exist and
investors need to be vigilant in terms of making investment decisions.
What if OPEC Cuts its Supply:
If OPEC chooses to cut its supply, the immediate reaction would be a halt in the declining oil prices. At
the moment Brent crude oil is trading just above $80. Brent has seen a decline in price of more than $20
as the oversupply of oil is being absorbed by the market. If OPEC decides to take a hit in terms of market
share, it will help the OPEC members like Iran, Iraq and Algeria. It will also be beneficial for the investors
in oil industry as the prices will stabilize and start regaining the uptrend. Finally, the cut in supply will
help the shale oil producers as well by eliminating the pressure on the high-cost producers. Currently,
some of these high-cost producers are quitting oil production, while some have already halted further
exploration.

What if OPEC Does not Cut its Supply:


In the event that the OPEC does not cut its supply, prices will further fall. At this point, it is very difficult
to predict a balancing price as we are seeing a slowing growth in global economy. Nonetheless, a fall in
price is certain. This decline in price will put pressure on shale industry production, as the shale oil is
comparatively quite expensive than the conventional oil. OPEC Secretary-General Abdalla El-Badri said
at a conference in London on Oct. 29 that current oil prices could take 50 percent of shale oil output
out of the market as investment in higher-cost production dries up. The shale drilling boom showed
signs of slowing last week. Oil rigs sank by 14 to 1,568, Baker Hughes Inc. said. Contrarily, this will help
OPEC to maintain its market share; but at the expense of its members interests like Iran, Iraq and
Algeria. How these countries will react to such a proposition is hard to predict. But, this decision will
benefit OPEC, on average, in the short term at least.
On the other hand, one important viewpoint is that shale production technology is improving as
exhibited by a decline of approximately $30 per barrel of oil produced since 2012. If this trend
continues, conventional oil will be put directly under threat by the shale production; and OPEC will face
the risk of foregoing its influence over the oil market. This hypothesis is, however, to be considered over
the longer term, and not probable in the shorter term.
Final Remarks:
Given that the pros and cons of cutting oil production to OPECs own members, presents a potential
divide among the members interests, it is very difficult for them to reach a consensus decision in the
meeting on 27th. And, it is even more difficult to foresee and predict such a decision. Therefore, Ill
recommend investors to wait and keep an eye on the outcome of the meeting.

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