How will OPEC drama affect oil prices?

The group's upcoming meeting this week will be closely watched.

By Jim J. Jubak Jun 12, 2012 4:42PM
Image: Oil derricks (© Comstock/Corbis)Saudi Arabia and Iran are headed for a high-speed collision at Thursday's OPEC (Organization of Petroleum Exporting Countries) meeting in Vienna.

That much is clear.

What's not at all certain is that what effect the collision will have on oil prices. (OPEC pumps about 40% of the world's oil.)

This OPEC meeting it more fraught than most because there are two big items on the agenda.

First, OPEC is set to elect (or at least discuss electing) a new secretary-general, and both Saudi Arabia and Iran are pushing their own candidates. With the two countries locked in radically different positions on expanding/contracting OPEC production, I think the door is wide open to the selection of one of the compromise candidates backed by Ecuador or Iraq. (Of course, OPEC could deadlock. From 2004 to 2007, the organization was without a secretary-general because members could not agree on a candidate.)

Second, the Saudis have proposed that OPEC raise its official production quotas in order to keep global oil prices at $100 a barrel or less (for benchmark Brent crude.) The Iranians, who have seen their oil exports drop due to sanctions imposed by the United States and the European Union, want OPEC to lower production so that prices climb and oil importers have fewer alternatives to buying Iranian oil.

Saudi Arabia has raised its production above its quota to increase supply and lower prices during the current global economic slowdown. The Saudis say that it is in OPEC's self-interest to prevent a slowing of the global economy that would further reduce demand for oil. Iran, however, sees the increased production from Saudi Arabia as an effort to grab market share while Iran faces sanctions. OPEC pumped 31.6 million barrels a day on average in April. That was 1.6 million barrels a day above the official production quota set in December. Most of that "excess" production came from Saudi Arabia.

The pre-meeting guessing is that the Saudis will ask OPEC to raise its production quota to 30.7 million barrels a day beginning in July. Which would still leave OPEC production above the official quota.

So what's the point?

An increase in the official quota would give Saudi Arabia more "cover" for continuing to pump at current levels. Global oil consumption typically rises in the third quarter of the year that marks the end of the refinery maintenance season. It’s unlikely that Saudi Arabia will cut production during that period no matter what OPEC decides.

But an increase in the official quota that is still below what OPEC is producing now would also give the Saudis room to reduce production -- voluntarily -- in the last quarter of the year if the global economy is showing more strength. That would allow Saudi Arabia to give its stretched oil industry some breathing room and would bring in more revenue as oil prices rose with even a modest recovery in demand.

So what's the most likely effect of the OPEC meeting on oil prices?

Stability over the next quarter and a half at something like the $90 to $100 a barrel (for Brent crude) range preferred by Saudi Arabia. And then the possibility of rising oil prices in the fourth quarter of the year -- if it looks like the global economy is strong enough to pay the price. This price scenario would be good news for shares of oil drilling and service companies such as Schlumberger (SLB), Ensco (ESV) and SeaDrill (SDRL). Schlumberger is a member of my Jubak's Picks portfolio.)

I think this is the likely scenario even if Saudi Arabia and Iran can't reach any kind of agreement on Thursday.

At the time of this writing, Jim Jubak didn't own shares of any companies mentioned in this post in personal portfolios. The mutual fund he manages, Jubak Global Equity Fund (JUBAX), may or may not own positions in any stock mentioned. The fund did own shares of Ensco, Schlumberger, and SeaDrill as of the end of March. For a full list of the stocks in the fund as of the end of the most recent quarter, see the fund's portfolio here. 

44Comments
Jun 12, 2012 7:16PM
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One question here?  If demand is down, and the price of a barrel of oil is down what?  20.00, why is gas down about .20 cents?  When oil goes up so does the 9/10ths of a gallon of gas instantly.

 

I have to agree with the drunk.  Its election time.  I have been to Kuwait, and I live in ND where we cant even get our oil out thanks to this president. 

 

Drill baby drill, we are.  Take a trip up this way and look at what used to be and where we are now.  Nothing will ever be the same.  I am just tired of bending over and taking it.  going to have another shot and maybe a beer, this is getting old.  The nice thing is that eventually it all will take a big crap.  I dont care who is in charge, but be realistic.  No demand and yet you screw me daily at the pump?  Enough.  Honestly in your lifetime there is enough oil in the US Alone to take care of oil for a lifetime.  Trouble is we need to export it to make money(Pipeline), why not take care of US first? 

 

When you can tell me why my income has stayed the same and yet oil is what 000% increase tell me why?  Diesel used to be chaeaper than gas, why is more now?  Tell me why?  We export more than is used in the US so why screw me harder?  That is a fact.  If I am a moron like the drunk was let me know why and tell me why I am getting screwed daily. 

Jun 12, 2012 7:26PM
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speculation raises the price we pay, nothing more you boneheads,im continually amazed at the naive nature of my lost american brothers and sisters,THAT BELIEVE.a country that is so sophisticated and technologicly so advanced as this country is, it can hear a flea fart in the sahara, yet heard not a whisper bout 911,shouldnt surprise me, that it still believes every friggin word it reads in the paper.
Jun 13, 2012 4:08AM
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The price of oil and gasoline is determined by those who manipulate and control the crude oil futures markets, namely, the IntercontinentalExchange (ICE), ICE Futures Europe and the NYMEX, and the price of oil is not decided by Obama, OPEC, Iran, the Euro Zone, Spanish banks, Greek debt, refinery fires, Libya, Saudi Aramco,Inc., the laws of supply and demand and so on. The Commodity Futures Modernization Act 2000 (Enron Loophole), passed by Senator Phil Gramm, gave control of the oil markets to the speculators and traitors.
Jun 13, 2012 3:15AM
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So as long as the Saudi's get their oil price around $90-$100/barrel, I guess everything will be okay, since what they want is the most important thing.  Doesn't make much sense to us 99 %ers who have trouble filling the car up every time.  Gotta wonder if people and the economy get pushed to hard, people may just park their cars and stay home for a while.  The greedy may get to swim in their oil if they get too greedy and break our wallets.
Jun 12, 2012 9:45PM
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Seeing how the general public does not buy oil but once every 3,000 miles (0r 6,000 miles on newer cars) so who really cares. It apparently has no effect on the speculated prices of gasoline anyways. I am really fed up with discussions of oil and how they affect the good people of the United States when really we are all like mushrooms, kept in the dark and fed a bunch of SH%$#T. Let’s face it, we are told what to believe, like it or not. If the protocol changes, we are to believe whatever the media shoves down our throats. Thanks Jim.

Jun 12, 2012 8:39PM
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Let OPEC raise the prices, that means we need to hurry up and get the Keystone pipeline thru so Opec can kiss a goat!

Obama was against it and I wrote to him at the whitehouse and he sent me letter that it was supposed to be harmful and that his people said that and he wouldn't go for it.

And lo and behold when it got to be popular he changed his stance and now he is for it .In it for the VOTES, is he not? Let OPEC drink thier oil!!!!

Jun 12, 2012 6:02PM
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the only drama affecting oil prices is that cretin commie obama's refusal to let industry drill for our own here, there are trillions of barrels of oil just waiting to be cut loose with our latest technologies, but instead we're subsidizing Brazils oil drilling efforts!! this is so outrageous there are no words to adequately describe this obama vermin's catastrophic policies, doubling and tripiling down on failed policies. so spare me OPEC crap! we don't need them, we need a pres with the balls to drill for our own resources. oil is a natural organic medium and the left would have u believe that this is some toxic waste cooked up by Republicans, outRAGEous!! Pres. Romney in Nov in 4.5 months, hang in there America a new prosperous economy begins soon!! Down with marxisim/stalinism/leninism and most of all obamanism!!
Jun 12, 2012 7:44PM
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For those that don't understand why we should'nt be drilling, it's quite simple. The companies that bring oil out of the ground will sell it at market value, So the reduction you'd see at the pump would be minimal. There's a great thing called conservation, imagine a world in chaos/ at war, and we have a "stock-pile" of oil reserves, or, other peoples oil fields dry up, and we have some to sell (at a much higher rate than the current ones) which would then perhaps give us the luxury of paying off some debt, or god forbid putting more teachers in a class room. Drilling now to maximum effort would only hasten the demise of America. Playing it "cool" and letting our reserves sit in the ground is not a bad idea. Further more, the people that want to drill and exhaust a resource that we know we can work with and have no ambition for alternative energy sources are really putting our decendants at risk of being completely screwed. The problem with most people is the lack of forward thinking, its always about me, and about the moment. When you scream about the price of gas, I wonder to myself, when was the last time this individual tried mass-transit, a bicycle, or heck even walked. There are things you can do to reduce your consumption, and if enough people did them, the price of gas would fall.

Jun 12, 2012 6:45PM
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You do realize that "Drill baby Drill!!" won't work because oil companies will simply sell it on the open market at whatever the market will bear, don't you? Blaming it on Obama is simply naive.
Jun 13, 2012 9:54AM
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Perhaps one of the worst headlines EVER written?

 

"Will OPEC drama affect oil prices?"

 

 

Jun 12, 2012 8:08PM
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Obamanomics = a glut of oil and a glut of unemployed workers in the global markets. 

 

Nice job, Barry.  Mmm, mmm, mmm.

Jun 13, 2012 10:08AM
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I don't mind folks making a "living"....but will do my best not to help folks make a "killing". I don't like anyone getting a raise without asking me. We are in a place where they jacked up gas this past week 50 cents a gallon, although futures showed a drop each day this week. When they do that, I do my best not buying much gas at all....I'd rather ride my bike past these places hoping their gas rots in their tanks.
Jun 13, 2012 2:48AM
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Why all the name calling? If someone has a different opinion from yours, then debate the facts of your opinions. When the first words outta your keyboard is an insult, most folks just glance by the rest of what you might be trying to say and if you may have had a valid point or argument, you lost it at "Hey moron..."  We all sit here and complain that the right wont get out of obamas way, and the left just wants to go socialist so a bunch of lazy pukes can mooch off the other 50%. If we are any example of We the People, no wonder nothing gets done in gov't. Personally, I love it, lol, all this fighting and spending, it is gonna bankrupt the fed, and thats what I'm about, get rid of the federal gov't, power to the States, power to the People in a manner that allows us the freedom from gov't corruption and self serving idealogs. As for the oil, well, sooner or later it will be gone, then we can move on to something else to call each other names about. 
Jun 13, 2012 5:22AM
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Jubak is a JOKE we are in a recession/depression he believes the false unemployment numbers of 8.1 percent,(real numbers range from 16-22 percent JUBAK!) does this joker have billions of fiat currency?..NO so don't listen to this hack..if you want to lose your money put it in a Jubak mutual fund and watch your nest egg go to ZERO!...this hack can't get insider information like Buffet, C Munger, or Billy Gates...they all said gold was bad well they missed the best gold bull run of the last 10 years why would I listen to those hacks too..listen to me SILVER is a great buy right now not this Wall Street Crap JEWbak pushes.
Jun 13, 2012 10:09AM
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I don't have to pay $50.00 a week for gas anymore, now around $8.00. I bought a motorcycle and get 60+ miles per gallon and leave the 10 miles per gallon SUV at home. Its a lot more fun to drive too!
Jun 13, 2012 10:35AM
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What difference does the price of oil make?  We will still get screwed at the pump!

Jun 13, 2012 10:55AM
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Of course it will. Oil prices have been dropping. What makes oil prices rise, speculation based off of, well, drama. OPEC is creating this to drive the price of oil back up.
Jun 13, 2012 5:57AM
Jun 12, 2012 6:21PM
Jun 12, 2012 7:28PM
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i would like to know why so many people voted for obama when he said he wanted to change the flag and the national anthem in 2008, or am i wrong? or did no one hear what he said? he is putting us in a country so we can beg for our food and healthcare, folks you better start reading more  than just stocks, this man is also running with the mouth about secrets that no one should hear. how about all the hush, hush with the VP of china, this man is up to no good, drill baby drill, yes it will go on the open market, other countries went on open market and their fuel cost at the pumps are 1.50 cheaper than ours,  i'm with SRT and i don't need a shot and beer.
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