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Bear Market Trader | What drives oil prices? The Supply side: OPEC vs non-OPEC
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What drives oil prices? The Supply side: OPEC vs non-OPEC

Points to take away from this read

 

OPEC and non-OPEC coun­tries have dif­fer­ent agen­das when it comes to oil production.

Non-OPEC are more inclined to fol­low mar­ket conditions.

OPEC tries to keep the oil mar­kets reg­u­lat­ed and pro­vides a cush­ion for the world’s oil supply.

OPEC is in hands of Nation­al Oil Companies.

Non-OPEC is in hands of Investor-owned Oil Com­pa­nies and care more about their share­hold­er value.

 

Disclaimer

All the infor­ma­tion here I looked up on the U.S. Ener­gy Infor­ma­tion Administration’s web­site and some from Wikipedia. I am not pre­tend­ing to come up with all this infor­ma­tion myself. The only thing I did was go through the infor­ma­tion and put togeth­er pieces of it to make it eas­i­er to under­stand and access for myself. This, I want to share with you and I hope it ben­e­fits you in some way.

Please go over to these respec­tive web­sites for more information:

EIA on ‘What dri­ves Crude Oil’

https://www.eia.gov/finance/markets/crudeoil/

Wikipedia on ‘list of coun­tries by oil production’

https://en.wikipedia.org/wiki/List_of_countries_by_oil_production

https://commons.wikimedia.org/wiki/File:Oil_producing_countries_map.png

 

So here it goes…

 

Where does all the oil come from?

When we think of oil we usu­al­ly think of oil sheiks and Arab states of the Per­sian Gulf. Most think these are the only OPEC (Orga­ni­za­tion for the Petro­le­um Export­ing Coun­tries) states, but as of May 2017, there are 14 mem­bers of OPEC and not all are Gulf states.

Keep­ing it simple

As I tried explain­ing in the dis­claimer this post is just going to be the sum­ma­riza­tion of ‘facts’ I have found on the inter­net. Sort of like a cheat sheet for any­thing on the sup­ply side of crude oil. The sources I have men­tioned in the dis­claimer so head on over and look up more details if you wish. 

Current members OPEC

 

  1. Sau­di Ara­bia 10,460,710 bbl/day
  2. Iraq 4,451,516 bbl/day
  3. Iran 3,990,956 bbl/day
  4. Unit­ed Arab Emi­rates 3,106,077 bbl/day
  5. Kuwait 2,923,825 bbl/day
  6. Venezuela 2,276,967 bbl/day
  7. Nige­ria 1,999,885 bbl/day
  8. Ango­la 1,769,615 bbl/day
  9. Qatar 1,522,902 bbl/day
  10. Alge­ria 1,348,361 bbl/day
  11. Ecuador 548,421 bbl/day
  12. Libya 384,686 bbl/day
  13. Equa­to­r­i­al Guinea 227,000 bbl/day
  14. Gabon 210,820 bbl/day

 

OPEC totals 35,221,740 bbl/day of the 80,622,287 bbl/day mak­ing it 44% of the total world oil production.

 

Non-OPEC countries

 

  1. Rus­sia 10,551,497 bbl/day
  2. Unit­ed States 8,875,817 bbl/day
  3. Chi­na 3,980,650 bbl/day
  4. Cana­da 3,662,694 bbl/day
  5. Brazil 2,515,459 bbl/day
  6. Mex­i­co 2,186,877 bbl/day
  7. Nor­way 1,647,975 bbl/day
  8. Kaza­khstan 1,595,199 bbl/day
  9. Oman 1,006,841 bbl/day
  10. Unit­ed King­dom 939,760 bbl/day

And many oth­ers. Look here for the full list: 

https://en.wikipedia.org/wiki/List_of_countries_by_oil_production

 

OPEC vs Non-OPEC on Oil Production

 

  • World pro­duc­tion
    • OPEC 40%
    • Non-OPEC 60%
  • Mar­ket share inter­na­tion­al­ly trad­ed oil
    • OPEC 60% and thus has more influ­ence on inter­na­tion­al oil prices
    • Non-OPEC 40%
  • Oil pro­duc­tion regulation
    • OPEC has a cen­tral coor­di­na­tion, non-OPEC coun­tries make inde­pen­dent decisions.
    • OPEC active­ly sets pro­duc­tion tar­gets for its mem­bers to man­age oil production
      • Indi­ca­tions of changes in pro­duc­tion by OPEC’s largest pro­duc­er Sau­di Ara­bia fre­quent­ly influ­ence prices
    • Not all OPEC mem­bers com­ply with pro­duc­tion targets
    • Non-OPEC coun­tries usu­al­ly fol­low mar­ket con­di­tions for scal­ing up or down in production
  • Who con­trols the oil production?
    • OPEC is most­ly in hands of Nation­al Oil Com­pa­nies (NOCs)
    • Non-OPEC most­ly in hands of Investor-owned Oil Com­pa­nies (IOCs)
    • IOCs care more about share­hold­er val­ue, NOCs have to con­sid­er nation­wide fac­tors as well. Because non-OPEC coun­tries are dri­ven by eco­nom­ic fac­tors they respond to the mar­ket con­di­tions in pro­duc­ing oil.
  • Spare capac­i­ty as defined by the EIA is the vol­ume in pro­duc­tion that can be brought on with­in 30 days and sus­tained for the next 90 days.
    • OPEC’s biggest play­er Sau­di Ara­bia will usu­al­ly keep about 1.5 to 2 mil­lion bar­rels per day in spare capac­i­ty on hand for mar­ket management. 
      • This spare capac­i­ty is an indi­ca­tor of how well the world can react to poten­tial crises that decrease oil supply. 
      • Avail­able pro­duc­tion capac­i­ty by OPEC mem­bers is often used to deter­mine tight­ness of glob­al oil markets.
    • Non-OPEC usu­al­ly oper­ates at or near full capac­i­ty and thus have lit­tle spare capacity. 
  • Oil sup­plies
    • When non-OPEC sup­plies drop there is more need for the OPEC crude oil and thus increas­es OPEC’s influ­ence on oil prices.
    • Increas­es in non-OPEC sup­ply con­tribute to low­er oil prices
    • Dis­rup­tions of non-OPEC oil pro­duc­tion reduce glob­al sup­ply and can lead to increase in oil prices
      • Dis­rup­tions can take a long time and the uncer­tain­ty of when it will end increas­es oil price volatility
    • Unex­pect­ed out­ages can reduce OPEC production
      • The amount of the dis­rup­tion, how quick­ly it occurs, and the uncer­tain­ty of restor­ing the out­put have con­sid­er­able influ­ence on oil prices.
  • Cost of find­ing and pro­duc­ing oil
    • OPEC coun­tries have low­er cost con­ven­tion­al oil resources.
    • Non-OPEC has rel­a­tive­ly high costs in find­ing and pro­duc­ing oil
      • Because it costs them more, they are the pio­neers in uncon­ven­tion­al ways of find­ing and pro­duc­ing oil. They are the lead­ers in find­ing new technologies.
  • Oth­er liquids
    • An alter­na­tive to oil in some indus­tries are Nat­ur­al Gas Liq­uids (NGLs). This is anoth­er fac­tor that can keep an increase in oil prices down. 
    • NGLs aren’t includ­ed in OPEC pro­duc­tion allo­ca­tions and pro­vide a sub­stan­tial vol­ume increase to world liq­uids supply.
  • Future expec­ta­tions
    • Oil prices rely heav­i­ly on sup­ply and demand and what the expec­ta­tions are for future sup­ply numbers.
      • Down­ward revi­sions in expec­ta­tions on non-OPEC pro­duc­tion con­tributes to upward pres­sure on oil prices.
    • Because mar­ket con­di­tions are uncer­tain and rapid­ly chang­ing esti­mat­ing pro­duc­tion tar­gets is espe­cial­ly hard.
    • OPEC can also have sig­nif­i­cant lag respond­ing to mar­ket con­di­tions and thus in adjust­ing the pro­duc­tion tar­gets, which also impacts oil prices.
  • Geopol­i­tics
    • Geopo­lit­i­cal events have his­tor­i­cal­ly caused reduc­tions in oil pro­duc­tion by OPEC coun­tries and giv­en that OPEC is impor­tant to world oil mar­kets events that entail an actu­al or future poten­tial loss of oil sup­plies can pro­duce strong reac­tions in oil prices.

 

Thanks for reading

 

I hope this post helps to make the rela­tions between the OPEC mem­bers and non-OPEC coun­tries more clear. Also, I hope it helps with under­stand­ing their rela­tion to oil prices. 

If you like what I’m doing here please leave a quick com­ment. It will be much appre­ci­at­ed. Trolls are still wel­come as well. And sub­scribe to my newslet­ter if you like. 

T3chAddict
t3chaddict@bearmarkettrader.com

Day trader. Tech geek. Sim racer/Pilot.

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