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Crossroads for OPEC, Oil Market

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Crossroads for OPEC, Oil Market

If last week's OPEC meeting tells us anything, it's that the global oil market will never be quite the same.

State of Disarray

oil glutWhen the United States was suffering through the effects of the oil embargo during the 1970s, the international cartel known as the Organization of Petroleum Exporting Countries (OPEC) maintained a stranglehold on the worldwide crude oil supply. As the decades have passed, the cartel's vice-grip on supplies of crude oil has been loosened with the help of two new major producers, the U.S. and Russia.

Back when triple-digit oil prices were commonplace—up to just about a year ago—it was easy to buy into the perception that OPEC remained in control of the global markets for its abundant energy resources. The ball was largely in the court of Saudi Arabia, which accounts for about two-thirds of the 13-member OPEC's total production (and roughly 40% of global production). Yet, the last time that the Saudis chose to withhold its output of oil in order to support higher prices (or, said differently, in order to extort its customers, as cartels are prone to do), it made a mistake: Competitors stepped in to replace the missing supply, eating away market share that OPEC has failed to claw back.

Now, with Americans largely energy independent and Russia capable of providing ample oil supplies for its trading partners, the diminishing role of OPEC has been reflected in the plunge in prices.

On Monday afternoon, both major crude oil benchmarks were about 5% lower, with WTI crude falling below the $38/bbl mark and Brent crude approaching 7-year lows below $41 per barrel.

Crumbling Cartel

Saudi oil minister Saudi oil minister Ali al-Naimi

The only ostensible result from OPEC meeting Friday was that cartel agreed to meet again in June. Otherwise, no new production limits were set. Essentially, the cartel has now freed its members to pump as much oil as they please.

To date, both Saudi Arabia and Iran hold back hundreds of thousands of barrels of oil per day (the latter due to sanctions). It seems that Saudi Arabia is not taking the risk of falling victim to any perfidy if its fellow members agree to act in unison and then renege on that commitment, again robbing the Saudis of market share. The same applies to non-OPEC oil exporting countries, who have (understandably) ignored the cartel's calls for these producers to also cut production.

It's also not helping OPEC that natural gas is similarly in a supply glut, and is both cheap and abundant. Plus, although the process is gradual, steep oil prices during the last decade encouraged a great deal of investment in alternative energy sources like wind and solar. These renewable resources still only make up a sliver of global energy demand but will continue to chip away at the supremacy of crude oil faster than most observers believed just 18 months ago.

 

The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.

About the Author

Everett Millman

Everett Millman

Analyst, Commodities and Finance
Managing Editor

Everett has been the head content writer and market analyst at Gainesville Coins since 2013. He has a background in History and is deeply interested in how gold and silver have historically fit into the financial system.

In addition to blogging, Everett's work has been featured in CoinWeek, Advisor Perspectives, Wealth Management, Activist Post, and has been referenced by the Washington Post.

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