[miningmx.com] – THE price of oil such as the benchmark Brent Crude is heavily influenced by Opec, a cartel of producers mostly from the Middle East and Africa that controls its supply depending on economic conditions and price.
During periods of price pressure, Opec gets its members to reduce supply. Equally, it increases supply, sometimes to quash rival energy supply.
Take the lift in supplies over the last few years which is thought to be the means by which Opec member states have attempted to fight off the growth of energy from North American-based shale producers.
From about mid-2011 to 2014, non-Opec supply increased to some 2.5 million barrels per day largely owing to oil from shale, a move which prompted Opec to lift its own supplies in a strategy of supply-and-rule.
Shale production has consequently suffered as the price of Brent Crude fell from just over $100 per barrel to below $60/bbl during this year. The expectation of Barclays Capital is that the price of Brent will average $66/bbl during the first half of 2016, according to research in October.
But nobody can be quite sure. That’s because the oil market has become increasingly volatile and difficult to predict. This is partly owing to a growing view that Opec is losing its long-standing control.
The lifting of sanctions in Iran, an Opec member since 1960, will result in an increase of supply that other Opec members are unable to do anything about. In fact, the view is that in an effort to preserve margin and market share, even Opec members will push to supply more and more oil, including Saudi Arabia.
For instance, Opec raised the threshold for production to 31.5 million bbl/day at a meeting earlier this month in Vienna when, in fact, the expectation was that it would look to cut output to revive prices. Brent Crude price is currently trading at $37,67/bbl.
“The latest Opec meeting yielded no change and no words about how the cartel is going to deal with the additional supply from Iran net year,” said Ole Hansen, head of commodity strategy at Saxo Bank. “The first quarter is likely to be the most challenging of them all,” he said.
