OPEC has long been a major force influencing the price of crude. However, the kings of crude may begin to feel the effects of their reign coming to an end. Globalization, a larger OPEC group and the rise of alternative energies are all factors loosening the grip of OPEC on the crude markets. With less control over the markets, OPEC needs to create new tactics to influence prices, but new players are stepping up and contributing to the world’s supply of oil that may render their strategy ineffective.
In a frustrated effort to maintain market share, Saudi Arabia made an announcement in 2017 claiming an increase in its production. This contradicted its original claim of deeper production cuts as stated originally in a 2016 OPEC agreement. The market is saturated with crude from nations outside of OPEC, undermining their attempts to act as a market manager. Every once in awhile, however, they can still work magic and sway investors and the markets in one direction or another.
The 2016 agreement to cut production has opened the door for Russia to overtake the OPEC nations as the largest producer of crude. With the forecasted increase in production from the United States, OPEC could be facing an even smaller share of the global market. Currently, the supply of crude is continuously trending upward, and OPEC is struggling to control the supply.
It used to be, when OPEC spoke it created fear in the markets, leading to immediate action. The world accepted that the OPEC nations would stick to their agreements. However, increased world trade and economics has stretched OPEC agreements causing a greater chance for cheating. (In first quarter 2017, Iran broke the 2016 agreement by trading with Asia, for instance.) While doubt remains, OPEC’s influence as market manager will continue to weaken.
The rise of new energy sources — wind, solar, ethanol, etc. — brings new alternatives to crude, reducing some of the demand. While the world is far from a major switch off of crude, it does play a role in influencing its global demand. The increasing demand and affordability of alternative energy sources could keep crude from rallying hard down the line, and could even move the rally to grains should the demand for ethanol continue to increase.
OPEC is having trouble controlling the supply with more large players in the market. Weekly updates of supply numbers are also more readily available than they have been in the past. This transparency of supply can create more clarity when predicting the world’s demand. These weekly supply updates are also reporting a consistent upward trend in supply that could continue to rise with the expected increase in U.S. oil production. There are many factors contributing to the diminishing power of OPEC, and investors should keep an eye on the markets for any announcements. Working with a trusted adviser can help investors remain abreast of potential changes.
Howard Marella (hmarella@iconalts.com) is founder and CEO of Icon Alternatives.