Is OPEC At The Mercy Of Oil Markets?

Is OPEC At The Mercy Of Oil Markets?

Less than a week before its next meeting, OPEC and OPEC+, the affiliated organization that includes Russia and other countries, is once again showing signs that they have become reactive. Whereas once OPEC tried be a force of stability in oil markets, now the cartel and OPEC+ have put themselves in a position where instead of setting policy and leading the markets, they are reacting to the moves and sentiments of others. This is not a good sign for the power and influence of OPEC+.

The JMMC (Joint Ministerial Monitoring Committee) is the body that recommends action for OPEC and OPEC+. It met last on November 17, and did not issue a policy recommendation to the larger group. Despite the lack of any official word, analysts believe that OPEC and OPEC+ are considering a three or six month extension of the group’s current quotas. Right now, the current production quotas are designed to expire January 1 and production is set to increase by 2 million barrels per day. The reason for this change, which has been under consideration since early October, is that oil consumption has been lower than expected due to economic lockdowns and travel restrictions in Europe and the U.S. Market watchers praised it as a prudent move by the organization to keep oil prices from falling further during the winter months.

However, since the JMMC meeting on November 17, the price of oil has actually risen, based largely on the promise of new vaccines for coronavirus. Now, we have word that Saudi Arabia and Russia are calling an informal meeting of JMMC representatives on Sunday, in advance of next week’s full OPEC and OPEC+ meetings. In other words, OPEC and OPEC+ are reconsider their reaction to the ever-moving market. However, oil market fundamentals indicate that demand is still sluggish in the U.S. and Europe while production remains robust.

In past eras, OPEC looked at the long-term horizon, which is the only reasonable way for oil producers to assess the market. Now, the cartel seems keen to respond to every change and blip in the market, dangling the possibility of adjustments to production levels every two months. This is not a good way for OPEC or its member nations to operate.

First, it isn’t helpful for member nations. Many of these oil producers are not in a position to adjust their production based on the immediate movement of the price of oil. Revenue from oil sales is how most of these states make money. They need to set their budgets and work with oil companies that extract the oil. If OPEC keeps changing their oil production quotas every few months, they won’t be able to budget effectively. Second, by becoming reactive, OPEC has made itself less powerful as a player in the market. Yes, traders will watch to see what OPEC does, but they know now that OPEC is watching them even more closely and acting based on their whims.

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