There is too much petroleum on the planet, and not enough buyers. There are 2m barrels per day of crude oil generation that do not have a house, according to the International Energy Agency.
Opec still controls about 40% of the world’s international petroleum output of 94.2m barrels a day. However, the cartel’s management is falling: output from non-Opec members like Russia as well as the US is growing. Crude oil costs are skidding, with the US standard as well as the international Brent benchmark, West Texas Intermediate, at four-year lows. As of Wednesday Brent crude oil traded for around $80 a barrel, while WTI was around $74. And demand is down because of economic weakness in Asia and Europe, while supply is increasing.
Consumers are enjoying the low costs, as US retail gas costs average $2.81 a gallon – the lowest in four years, according to AAA.
This really is bad news for a cartel, which, after all, gets its own dignity and its gains from its capacity to control petroleum costs. In years past the cartel did a fantastic job keeping oil prices steady and high. But those high, steady costs additionally undermined Opec: it provided room for US shale oil companies create this and to invest in their own infrastructure -gushing supply of black gold that matches Opec. US crude oil production is at a 30-year growing due to the river of inexpensive and high shale. Customers may also go right to alternative petroleum companies or Russia, Mexico, Norway who do not belong to Opec.
What to do? In years previous, Opec put a floor under prices and would simply shut off the spigots to control generation.
Now, however, it is too difficult.
Opec is facing a competitive threat from various other sources of energy, especially US shale oil companies. Just turning off the crude oil pumps could mean losing the long term share of the market of petroleum and helping the opponents of the cartel.
These reasons make the Opec meeting in Vienna of Thursday critical, petroleum market watchers said. There is an increasing consensus that Opec’s 12 members will consent to at least a little reduction together with the cartel likely cutting about 500,000 barrels, to its day-to-day goal generation amount of 30m barrels. Goldman Sachs analysts said it “isn’t in [Opec’s] interest” to cut more.
That will not treat the mismatch between demand and supply, but it may help control some of the sudden losses in crude oil costs.