OPEC Optimistic About Oil Prices

OPEC Optimistic About Oil Prices

During the recent Chinese Economic Decline, particularly, the decline of manufacturing sector decline, the impact over oil prices are apparent. Prices have fallen from more than $110 a barrel in the summer of 2014 to less than $37 a barrel now due to oversupply and slowing demand.

OPEC was founded in 1960 by Iran, Kuwait, Saudi Arabia and Venezuela.

Despite of this decline OPEC is desperate that oil prices would begin to rise in the longer term starting from the next year due to high exploration costs.

It expects the market share of OPEC producers to shrink by 2020 as rivals prove more resilient than expected.

The group currently account for about 30% of the world’s oil production, where it has to be recognized that it had enjoyed about 50% of the total oil production in the 1970s. Part of the reason for this decline is the emergence of vast quantities of shale oil produced in the US. This has also been factor in pushing down the price of oil to 11-year low since the Demand – Supply plays a vital role in setting of the prices. Apart from increased oil production the Demand – Supply relationship has been exacerbated by the declining production in China that acts as the key gauge in measuring economic health of Asia. 

OPEC’s optimism has been reflected from its expectation highlighted in its World Oil Outlook report that supply growth from US shale to slow dramatically next year, as producers struggled to cope with such a low prices.

OPEC’s strategy this year has been to allow prices to fall by maintaining production in the hope that, eventually, US shale producers will be forced out of business. OPEC also highlighted weaker economic growth in China as another factor behind the low oil prices. It said that “Economy of China seems to be maturing and growth is decelerating faster than previously expected”. 

Recovering of the prices

The report also highlighted the “huge reductions” in spending on exploration and production by the industry as a whole due to low oil prices. 

These cutbacks will eventually reflect the reduced supply that will allow upward pressure on prices.

Another longer-term factor to influence the prices to move upward is the reduced availability of the onshore oil exploration sources and according to report this will enforce the companies to conduct deep water drilling to explore the potential oil sources. In this regard it has to be recognized that offshore exploring is considerably more expensive than drilling onshore.

Moreover, OPEC also sees the Population and longer term Economic growth (as the driving reasons for increased energy demand) and expected them to increase the energy demand by almost a half by 2040, increasing demand for oil.

However, the validity of those expectations has to be monitored against the changes in oil prices, particularly, in the year of 2016 and onwards.