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How does the OPEC meeting affect traders?
OPEC’s members are estimated to control more than three-quarters of proven crude oil reserves,1 and the organisation supplied approximately 34% of the world’s oil in 2017.2 As a result, the production quotas set at OPEC meetings can have a strong impact on the global supply of oil and influence its price. The quotas set can also affect demand in other energy markets, including natural gas and heating oil.
This makes OPEC meetings important dates in some traders’ calendars.
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How does OPEC change the oil price?
OPEC aims to change the price of oil by adjusting supply volumes. If its members want to increase the price of oil, they can revise their production quotas downwards to limit supply. Alternatively, if they want to reduce the price of oil, they can raise their production quotas to increase supply. Assuming demand remains constant, the price of oil will move in the intended direction.
Other major producers - such as Russia, Mexico and Kazakhstan - also sometimes attend OPEC meetings as non-voting observers to coordinate production levels. For example, in January 2017, several non-members agreed to cooperate with OPEC to reduce oil production, with further cuts agreed in December 2018, and extended in July 2019.
However, OPEC’s ability to regulate oil prices has subsided this decade due to shifts in global supply and demand. The US has increased its domestic shale oil production in recent years, reducing demand for OPEC-produced oil. This has put downward pressure on global prices, even as Chinese consumption has rocketed. However, there have still been occasional short-term price spikes as a result of global crises (eg the Arab Spring in 2011), as uncertainty surrounding future supply drives surges in demand.
Traders may therefore wish to consider other economic data and news sources, in addition to the latest OPEC quotas, before speculating on oil prices.
Why do OPEC countries agree to oil quotas?
OPEC’s stated aims are to ‘coordinate and unify the petroleum policies of its member countries and ensure the stabilisation of oil markets in order to secure an efficient, economic and regular supply of petroleum to consumers, a steady income to producers and a fair return on capital for those investing in the petroleum industry.’
While OPEC’s mission statement might sound noble, it is really a cartel. It acts to fix prices, maximise profits and limit competition between its members. It has often been accused of anti-competitive actions including profiteering by constricting supply, and deliberately creating oil surpluses in an attempt to drive down prices and bankrupt competitors (like US shale producers).
Politics is also sometimes involved. For example, in 1973, its members voted to restrict supply to target countries it felt were supporting Israel in the Yom Kippur War. Global prices went from $3 a barrel in October 1973 to $12 a barrel by March 1974.
However, OPEC meetings can end in stalemate if members are not able to unanimously agree new production volumes. Reaching a consensus is not easy as member countries will generally seek to maximise their own production levels, and limit other countries’, in order to benefit from the best possible prices and volumes. This problem is sometimes exacerbated by unrelated political tensions between nations. Friction between members can also arise if any country has exceeded the previously agreed quotas, as this can reduce the prices received by the group as a whole.
OPEC meeting format
Ordinary meetings are held twice a year, at the organisation’s headquarters in Vienna. Generally, these meetings are six months apart. Extraordinary meetings – meetings that occur outside of the biannual schedule – can also be arranged for matters that cannot wait until the organisation is next meant to meet.
Decisions are announced via press conference on the day of each meeting, with most decisions becoming effective 30 days later (except where another date is agreed or the decision is vetoed by a member before it is implemented).
OPEC also publishes monthly and annual oil market reports, as well as an annual world oil outlook report which assesses the long-term prospects for oil.
OPEC calendar 2019
|177th OPEC meeting||5 December 2019||Press conference, 5pm (UK time)|
At the last OPEC meeting, it was agreed that supply restrictions would be extended for another nine months, beginning in July 2019 and running until March 2020. In total, the group and its affiliated non-members agreed to cut production by 1.2 million barrels per day.
The supply cuts are a response to falling oil prices, brought about in part because of an increase in US shale output. By reducing its production for the next nine months, OPEC hopes to stabilise the price of oil on the global markets.
Which countries are members of OPEC?
When OPEC was formed in 1960, it had five founding members: Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. Since then, the organisation has grown to include 14 member countries as of July 2019.
Each country is expected to send one or more delegates to each conference meeting, but there must be at least two-thirds in attendance for the meeting to obtain quorum. If a country’s delegation consists of more than one person, they must appoint a head of the delegation. This is usually the country’s oil or energy minister.
Each country has a single vote, and countries must vote unanimously before any change to policy can be implemented. Other countries may attend meetings as observers if permitted by the conference, but they do not get a vote.
|United Arab Emirates||1967|
|Republic of the Congo||2018|
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What is the OPEC meeting?
The OPEC meeting is a twice-yearly session in which the organisation sets oil production quotas for each of its 14 member countries. These quotas are important because they affect the global supply of oil and, in turn, its price.