Analysis: Why OPEC is losing its grip

Analysis: Why OPEC is losing its grip

7 April 2015, 10:01
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The 12-member Organization of the Petroleum Exporting Countries (OPEC) which controls more than 80% of the world’s oil reserves (as of 2013), is losing its sway over crude-oil prices that it has been credited with in the past.

Since the 55-year-old cartel announced last year that it wouldn’t slash oil production to restrain a mounting supply glut fueled, by U.S. shale producers, a growing chorus of market watchers are declaring the cartel dead — or at least significantly neutered.

Francisco Blanch, Bank of America’s Head of Commodities, is the latest Wall Street player writing OPEC’s epitaph.

In an intervew with CNBC Blanch told that OPEC has very little power over crude-oil prices CLK5:

"OPEC has effectively let [the market] do the work that they once did,” Blanch said. “They are letting the market find equilibrium instead of controlling market prices.” 

Letting the market call the shots on oil prices certainly isn’t the organization’s typical course of action.

“Today the situation is hard. We tried, we held meetings and we did not succeed because countries (outside of OPEC) were insisting that OPEC carry the burden and we refuse that OPEC bears the responsibility,” Saudi oil minister Ali al-Naimi as Reuters reported March 22.

Jeff Currie, one of Goldman Sachs’s top commodities strategists, made similar notes in October, saying that U.S. shale producers have been putting pressure on OPEC’s ability to influence prices.

Alan Greenspan, former chairman of the Federal Reserve, also criticized OPEC’s crumbling authority in an op-ed in the Financial Times back in February. Greenspan cautioned that OPEC’s pricing power may be something that may “never be regained.”

OPEC seems not to even stick to its own mission statement, which, in part, is to ensure “the stabilization of oil prices in international oil markets with a view to eliminating harmful and unnecessary fluctuations.”

Doubts about OPEC's power come as May Brent crude oil LCOK5 is rallying Monday, as concerns over Iran adding to global oil supplies subside momentarily and the dollar softens.

The moves outline some of the price fluctuations oil investors have experienced over the past three months. Price swings that OPEC may be less able to influence.

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