OPEC

What is the OPEC meeting?

The OPEC meeting is the bi-annual meeting of the Organization of the Petroleum Exporting Countries, and OPEC is probably one of the most important groups in the world. They are important as they have a strong influence on crude oil prices and supply, and therefore indirectly – your energy and transportation costs.

From a trader’s perspective, the meeting is important as comments leading up to the meeting and actual decisions at the meetings tend to set the trend for crude oil prices. There are two meetings per year, but OPEC can meet more than two times a year if they think it is necessary.

In January 2019, the group consisted of fourteen member countries, with Saudi Arabia being the unofficial leader. In 2016, OPEC was behind 44% of the world’s crude oil production, and they had control of 81.5% of the world’s proven oil reserves according to the US Energy Information Administration (EIA). Other large and important OPEC members include Iraq, with daily crude oil production of 4.4 million barrels a day in 2016, followed by Iran at 3.9 million barrels, and UEA at 3.1 million. However, all of these countries are dwarfed by Saudi Arabia and their production of 10.4 million barrels per day.

 

When is the next OPEC announcement?

The next official OPEC meeting will take place on June 25 and 26, 2019.

The meeting takes place two times a year.

  • 5 December 2019 – 177th meeting of the OPEC Conference – Vienna, Austria

6 December 2019 – 7th OPEC and non-OPEC Ministerial Meeting – Vienna, Austria

How does the OPEC affect crude oil traders?

Each month, OPEC will publish figures on actual crude oil production by its members, traders use this to get an understanding if supply is increasing or decreasing. Large swings might influence crude oil prices if production is too large or too low compared with their predetermined crude oil production targets.

However, more importantly, in the OPEC meeting, the members will share their future crude oil production targets.

 

How does OPEC change the oil price and oil production?

OPEC will indirectly control crude oil prices by altering their crude oil production. If demand remains the same, but they lower their supply, then crude oil prices should increase. While, if they increase supply, and demand remains the same, crude oil prices should decline.

OPEC does not control demand, but they make assumptions about demand and try to produce crude oil to keep prices stable at a favorable price for its members, without causing too much trouble for its buyers. They are aware that if they keep prices too high that large oil consumers will try to shift away from crude oil.

In the past, OPEC had some control over crude oil prices, but the increased production of shale oil, the dominance of OPEC has diminished.

 

How has OPEC affected crude oil prices in the past?

Following the Yom Kippur War, in October 1973, OPEC decided to reduce their production significantly and to introduce an oil embargo against the US and other nations that supported Israel in the war. OPEC’s action caused a large spike in crude oil prices, and they traded from 3 dollars per barrel to 12 dollars. In the US, energy rationing was introduced, and in the UK the workweek was cut from five days to three days, while in seven European countries, non important Sunday driving was banned.

The oil embargo ended in March 1974, but prices remained high, and it led to a global economic recession, high unemployment rate and inflation.

By 1980 crude oil prices had reached a high of 40 dollars per barrel following the Iranian Revolution and the Iran-Iraq war. As prices were high, industrialized countries made efforts to switch away from crude oil usage, and exploration by Non-OPEC countries was ramped up. As an effect, crude oil demand declined, and total world crude production increased, this caused crude oil prices to plunge.

To try to stabilize the price, OPEC in 1982 introduced audited national quotas. However, this failed as some members did not comply. Saudi Arabia did its best to cut its production and did so by 66% from 1981 to 1985, but this did not help to boost crude oil prices. Instead, they ramped up production to cause crude oil prices to plunge below 10 dollars per barrel, and thereby make high costs production outside of Saudi Arabia to suffer.

The most recent episode of heavy OPEC intervention was from 2014 to 2018. From 2008 to 2016 US crude oil production doubled, as shale oil production made it more feasible to produce crude oil in the US.

Over the same period, OPEC members consistently produced more oil, and the Chinese economy was slowing down, and requiring less crude oil. From its 2014 highs of $115 per barrel, prices slumped by 89% to their 2016 low of $27.

It took time for the prices to regain their footing, as Saudi Arabia was applying the same strategy of the 1980s to drive out high-cost producers. As the low crude oil prices started to tire out OPEC members and drive out high-cost producers, OPEC began to reduce their production in 2016, to ramp up the cuts in 2017 and 2018. At the time of writing in early 2019, the price was trading at $70 per barrel, a significant improvement from the June 2016 to October 2017 average price of 50 dollars.

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