OPEC's Big Gamble: Will It Agree On Oil Production Cut?

The international cartel of oil producers – OPEC, or the Organization of the Petroleum Exporting Countries – is scheduled to meet in the Austrian capital of Vienna on Thursday to consider steps to counter the plummeting crude prices. Touted as the most important gathering of the group's 12 member countries in years, the outcome of the meeting is expected to have far-reaching implications for all involved in the oil trade – from retail stations to budgets of oil-dependent nations.

The Crude Slump: Ample Supply vs. Weak Demand

Oil has tumbled 30% since June to near four-year lows, as the commodity enters into a bearish territory and flirts with the $75-a-barrel level. Crude prices are reeling from the effects of booming North American shale supplies in the face of lackluster demand expectations, weakening growth in China and a stagnant European economy.

The OPEC Dilemma

The big issue is whether the once-dominant body, which still supplies around 40% of the world's crude, will attempt to boost prices (or at least arrest the decline) through production cuts. However, with rapid production growth in the non-OPEC countries, there is a risk that even a large curtailment in volumes may not be enough to support prices.  

Saudi Arabia vs. Rest of OPEC

In particular, Saudi Arabia's stance is of utmost significance. Riyadh, by far OPEC's major contributor, is relatively better insulated from the oil shock as compared to some other members. Though around 90% of Saudi Arabia's government revenues are earned through crude, it is still better equipped to handle the commodity at current price levels.

However, for countries like Venezuela, Nigeria and Iran, $75-a-barrel oil is a real problem as these states are highly dependent on the commodity to fund government budgets and cannot withstand prices lower than this.

Therefore, despite Saudi Arabia dropping enough hints about its intention to preserve market share rather than trying to prop up prices by reducing volumes, it will risk the cartel's break up to achieve its goal.  

Meeting Outcome to Decide Crude's Direction

If the talks are totally inconclusive and nothing comes out of the meeting, oil may start the downward slide afresh, probably going down below $70. On the other hand, a coordinated output cut may help prices regain the $80 mark. However, it's anybody's guess as to what OPEC will do.

E&P Companies in Focus

The volatile oil exploration and production companies will be the most affected, as their fortunes are tied to commodity price fluctuation. Energy investors will be closely tracking S&P components including Apache Corp. APA, Noble Energy Inc. NBL, Murphy Oil Corp. MUR, Pioneer Natural Resources Co. PXD, as well as small-caps like Miller Energy Resources Inc. MILL, Sanchez Energy Corp. SN and Forest Oil Corp. FST.
 

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