OPEC Market Correction Could have Stopped Price Plummet

Monday, October 05, 2015

OPEC has much less to do with the oil market than most might realize. OPEC's problem is it let prices stay as high as they did for so long. This allowed new competition to the market from outside its cartel, namely from US oil and newly-tapped fracking reserves.

Remember that the reason oil prices dropped last summer wasn't that OPEC started to flood the market with oil, it was that OPEC didn't cut production. With U.S. production starting to boom, oil was all of a sudden cheap and plentiful. And OPEC dragged its feet to correct the situation, keeping oil production flat in 2014 at 30.1 million barrels per day.

Even in 2015 as Saudi Arabia has increased production to keep pressure on shale producers, OPEC is only expected to increase production by 0.8 million barrels per day. That's even less than the expected 1.17 million barrel per day increase in global demand.

OPEC gets a lot of blame for falling oil prices, and it certainly plays a role. Without exploding shale production, the oil markets wouldn't be oversupplied right now. And the only ones funding shale production are US and Canadian oil companies; good for the driver, bad for the investor.