The global collapse in oil price that started in 2014 has devastated many oil & gas companies. Casual observers know the general consensus is that OPEC is to blame for the huge crude oil supply glut that has bogged down the market. However, many may not know exactly what OPEC is and why it is driving prices lower.
The Organization of Petroleum Exporting Countries (OPEC) is a group of 14 countries led by Iran, Iraq, Kuwait, Saudi Arabia and Venezuela that are collectively responsible for producing roughly 40 percent of the global oil supply.
According to its website, OPEC’s mission is as follows:
Without any context, you might think OPEC is failing miserably in most of its stated objectives. Since summer 2014, crude prices have plummeted from over $100/bbl to as low as $26/bbl in February 2016 and remain extremely volatile. Oil investors have been hammered, and OPEC member economies are sputtering.
Throughout its history, OPEC has used production quotas to help keep oil prices stable. As global demand fluctuated, OPEC would alter the amount of oil produced to keep price changes in check. The $100-plus oil prices prior to 2015 were good for OPEC members’ economies.
However, as the U.S. shale oil industry began to boom in the past decade, OPEC’s priorities started to shift. Fearing that they were losing influence in the global market, OPEC decided to up its quotas and flood the market with oil in an effort to re-gain market share lost to the United States and other higher-cost producers.
This strategy is still playing out today, with bankruptcies in the U.S. energy sector piling up. Luckily for stock investors, correlation between oil prices and stock prices is relatively low. The energy sector has been hammered, but low gasoline and fuel prices have stimulated other parts of the economy.
Oil prices have stabilized a bit in 2016, but volatility is still well above historical levels. So far this year, the United States Oil Fund LP (ETF) (NYSE: USO) is flat overall.
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