It has been nearly ten years since the Organization of Petroleum Exporting Countries (commonly known as OPEC) realized they had the opportunity to affect the global price of crude oil. However, in the past two years, as the price continues to hover below $50 a barrel, OPEC has chosen a bold—but somewhat risky—direction.
OPEC has realized that low crude oil prices—if kept for too long—will crumble their profits. That much is obvious; so its a bold choice to hold these prices. However, the move is risky because OPEC is no longer the hegemony it once was; they no longer have the clout that goes along with holding 60 percent of global oil exports.
But now OPEC now accounts for no more than 45 percent of global oil production and export. That means that are not in any position, right now, to make the same decisions over long term crude oil price. Of course, to voluntarily reduce production, OPEC managed to drive the price of crude up to $50 barrel and higher. However, since granting concession to Nigeria and Iran, allowing them daily production allocation production, they have, apparently, eliminated controversy that could come out of its more valuable members.
This will qualify, then, as OPEC’s first output reduction in about eight years. Furthermore, it comes roughly two years after prices crashed from massive highs—over $100 per barrel. As such, OPEC has even asked Russia—and other non-OPEC members—to join in these cuts.
“Putin coming out to say Russia will be part of the initiative has added another layer of credence to the speculation there will be a coordinated cut,” explains New York energy hedge fund Again Capital partner John Kilduff. “At some point, the market will call them on it and say ‘show us the cuts.’ And at that point, the Saudis might be willing to underwrite the cuts on their own because they really want these high prices. To me, $55 Brent is without doubt the next target.”
Putin makes sure to add, “Russia is ready to join in joint measures to limit output and calls on other oil exporters to do the same. In the current situation, we think that a freeze or even a cut in oil production is probably the only proper decision to preserve stability in the global energy market.”