OPEC CAPITULATION TO US LOW-COST PRODUCERS?

OPEC continues to struggle to put its house in order. This week the blame is on Nigeria and Libya. OPEC is considering putting a limit on how much Nigeria and Libya can pump. The recent surge in production from those countries is complicating OPEC plans to control crude prices.

Libya’s crude-oil output has surged to over 1 million barrels a day, up from 450,000 in October, while Nigeria’s output has reached 1.7 million barrels a day, up 300,000 barrels a day since October.

Since last Vienna conference in November OPEC with Russia and other big non-OPEC producers were in agreement to limit production by about 1.8 million barrels per day. Libya and Nigeria were exempted because of civil unrest that created havoc in their domestic production.

However, Libya and Nigeria have now managed to increase production, while the other OPEC members cut. OPEC delegates from several countries are expressing their concerns especially as the price of crude continues to slip.

The intended effect of the production-cut agreement was to bring the world’s oversupply of oil back in line with demand and thereby boost crude prices. Instead, the petroleum market has remained depressed this year, and in spite of a slight improvement in early January prices are still below $50 a barrel as oil supplies remain high across the world.

But let’s be realistic surging production from Libya and Nigeria are not significant enough for a lagging price. If there is one finger to be pointed at, it is the USA.

U.S. output surged on the back of an initial price spike after OPEC’s output deal last year. Prices of Oil stocks surged in October and November of last year and Wall Street has been bullish throwing money to companies in the sector.

The price of oil has been oscillating widely in the past two weeks. Oil prices slid further Friday after a surge in the dollar, accelerating an already sharp downturn tied to re-emerging fears of oversupply.

A stronger dollar makes dollar-traded oil more expensive for foreign buyers. Oil futures often fall when that happens.

The reality is that there is an oversupply, producers are requested by Wall Street money managers to pump and the data show a sharp rise in U.S. production.

Data from the EIA show U.S. production increased to nearly 9.34 million barrels a day last week, from 9.25 million barrels a day the week before. Production was up nearly 11% from a year ago and nearly back at its 10-month high.

Thus, even if a deal is agreed upon by OPEC members and Non-OPEC members, the combination of Libya, Nigeria and the USA being outside of this agreement we can predict that the OPEC agreement will have little effect on the price.

What was supposed to lead prices higher will have a limited effect and OPEC will once again fail to shrink world oversupply and increase pricing.