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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.