Why OPEC Could Break Up

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Includes: BNO, CRUD, DBO, DNO, DTO, DWTI, OIL, OLEM, OLO, SCO, SZO, UCO, USL, USO, UWTI
by: Reynold Rego

Summary

The U.S House of Representatives will hold a meeting next month to discuss lifting of oil export ban.

The Russian economy will be affected by an output cut. Russia's stand on output is still unclear.

There is no consensus within OPEC over an output cut.

Brent crude oil prices have fallen by more than a third since June, and are trading around $78 a barrel. Last month, OPEC pumped 30.97 million barrels a day, which is above its production target of 30 million barrels a day. The OPEC members meet in Vienna on November 27th to review supply. We are highlighting some key points related to the meeting.

U.S. considering oil exports

A panel of the U.S. House of Representatives will hold a meeting on December 11th to discuss the lifting of the crude oil export ban that has lasted for over four decades. The House Chairman Fred Upton is yet to make up his mind, while Joe Barton will support the lifting of the ban. The U.S. Senate will debate the issue in January 2015. This could increase fears among a few OPEC members that they will lose market share to North American shale oil producers.

Russian output

Russia is losing $90 billion per year due to a 30% decline in oil prices and another $40 billion per year due to political sanctions. If the sanctions intensify and oil prices fall further, then the Russian economy could head into a recession in 2015. Saudi Arabia and Russia together produce 25% of global output. The pre-OPEC talks between Saudi Arabia, Venezuela, Mexico and Russia on an output cut have yielded no results. Russia's Energy Minister Alexander Novak proposed to cut production for raising oil prices. However, it appears unlikely as it will affect the Russian economy.

No consensus within OPEC

Kuwait wants to raise its output from 2.85 million barrels per day (or bpd) in October to 4 million bpd by 2020. Saudi Arabia, which pumps a third of OPEC's output, or 9.7 million bpd is unwilling to cut output. The Gulf Co-operation Council (or GCC) members Saudi Arabia, Qatar, United Arab Emirates, and Kuwait are unified against any output change. Cutting output by even 1 million barrels a day will cost OPEC members about $29.2 billion annually at current prices.

Venezuela needs oil to average $85 a barrel to repay its debt and support imports. Ecuador will need an average oil price of $79.70 a barrel to support next year's budget. Venezuela and Ecuador plan to call on OPEC to comply with a production ceiling of 30 million bpd.

Iran has accused Middle-East countries of undermining its economy by plotting with the West through their support for lower oil prices. The nuclear talks between Iran and the world powers have been extended till June 2015. Iran wants Saudi Arabia to cut oil production and is looking to boost its exports if sanctions against it end. Iraq plans to double its output from current 3.2 million bpd to 6 million bpd by 2017. Libya too wants to raise its production from the current 437,000 bpd, which is a third of its production of 1.55 million bpd in 2010. Recently Bloomberg reported that Iran, Iraq, and Libya will be spared from production cuts.

We observe that the 12 member OPEC is split into two to three camps over the output issue. There is no clarity on Russian output, while the U.S. could lift its oil export ban next year threatening market share of a few OPEC members. Saudi Arabia and other gulf members could survive by increasing supply at low crude oil prices due to their large foreign exchange reserves, while Iran and Venezuela will find it difficult to survive.

Final Thoughts

The OPEC meeting is largely dependent on the stand taken by Saudi Arabia and the remaining GCC members, who will decide whether crude oil prices should get a lift or have a free fall. We think there is a high possibility of no consensus at the OPEC meeting which could even lead to the cartel breaking up.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This article is for information purpose only. Please do your due diligence carefully before investing. We do not have any positions in crude oil future contracts. We do not intend to take any positions in crude oil future contracts within the next 72 hours.