Is OPEC Dying? - Views on News from Equitymaster

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Is OPEC Dying?

Jun 25, 2019

In 1973 when the Israelis bombed Lebanon, in a war now known as the Yom Kippur war, the OPEC (Organisation of Petroleum Exporting Countries, a cartel of 14 nations) brandished the "oil sword." It cut off oil to the west and sent oil prices well past US$ 20 per barrel.

It was the genius of Federal Reserve chairman Paul Volcker that saved the day for the USA.

Have you heard of Carlos the Jackal a.k.a. llich Ramirez Sanchez? He tried to storm into the OPEC meeting in 1975 with an intention to kill all OPEC members. Being a hired assassin, he was obviously retained by some people who thought OPEC was powerful enough to push oil prices higher.

And they were. Those were OPEC's heydays.

But a lot has changed since then. Deep fissures within the cartel members have emerged, that threaten to split the cartel right in the middle. What happens to the oil market in a post OPEC world, should OPEC not survive?

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Let's take an objective look...

OPEC is a cartel of uncomfortable alliances - The members are so diverse and politically opposed to each other, in some cases, you wonder what got them together in the first place. Many are not democracies and therefore work under a veil of secrecy. The only glue that binds this uneasy cartel is vested interest.

The seeds of OPEC's demise - Dominated by Saudi Arabia, OPEC allocates export quotas to its members based not an established oil reserves, but claimed oil reserves. Middle East countries (where most of the oil reserves reside) don't believe in disclosing their oil reserves. Not even to the OPEC. So a member nation that claims a 10% increase in reserves, can get a hike of 10% in its export quota. This is why even nations with depleting oil reserves claim increased reserves. How long can this last?

Nothing succeeds like excess - Many of the oil exporting countries don't have what you call a fiscal plan. Think of somebody who over spends often, his finances are likely to be a big mess. Bickerings about pushing oil prices higher, to improve OPEC members' profits, are dime a dozen. But demand destruction at higher prices occurs, since alternate energy becomes viable (solar, shale, wind energy etc). The poorer OPEC members naturally accuse the Saudis of domination. Sooner rather than later the fissures will widen.

The Iranian crescent - This is what spooks the Saudis the most - Iran and its flag with the crescent moon. There is a deep Shia - Sunni divide within the OPEC. It will only get more intense as Iran accumulates increasing political, military, and economic power. There is a high probability of a confrontation in the future. Consider the wars in Yemen and Syria as trailers.

The breakaways - Qatar has already announced its intention to leave the OPEC a few months ago. Sultan Qaboos of Oman hosted Israel's Prime Minister Benjamin Netanyahu a few months ago. Being friendly to an Israeli Jew is a punishable offence in Oman. The Sultan was going against the Arab unwritten diktat of being anti-Israel. Turkish strongman Tayyip Recip Erdogan will openly assist any nation that goes against the Sunnis. His policies towards the Kurds of Iraq are well documented.

The Aramco/MBS factor - Prince Mohd bin Salman (MBS) is in a hurry to reform Saudi Arabia. He is making enemies faster than he can fend off. Pushing through the Aramco IPO, making a tourist mega city in the desert, and a ballooning post oil economy are his dreams. He knows he cannot have enemies within and outside Saudi Arabia. Helped by USA's Jared Kushner, the Saudis are warming up to Israel. As long as Israel clobbers Iran. MBS isn't really interested in leading OPEC, after oil prices go into decline post Aramco's IPO. Without the Saudi muscle power, OPEC has little chance of surviving.

What next post OPEC?

With USA as a net oil exporter, it needs the dominant position in the oil market. Traditionally the US has had a pro Sunni policy in the Middle East by default. The Russians have a pro-Shia policy.

After OPEC disintegrates, the oil markets will be carved up by Russia + Shias on one hand and the USA + the Sunnis on the other.

What will be India's position?

We will have two sellers instead of a single cartel. So our negotiation power increases. Advantage India!

How long will it take for OPEC to lose relevance? My guess is, upto a decade maybe. The decline will accelerate after the Aramco IPO.

OPEC has left the building. Long live OPEC.

Have a profitable day.

Warm regards,


Vijay L Bhambwani
Editor and Research Analyst, Weekly Cash Alerts

Vijay Bhambwani

Vijay L Bhambwani, is the editor of Weekly Cash Alerts and Fast Income Alerts. He is a professional trader, author, trading mentor, and lifelong student of the markets. He has been an active trader since 1986. Financial markets are his life and passion. Everything else in his life revolves around his main objective - trading. Vijay believes that no matter how much a trader has lost in the market, it is possible with hard work and smart work to get it all back over time. Understanding the method behind the madness of the markets interests him more than the profits. He specialises in predictive style of technical analysis, in the commodity, currency, and equity markets. That is the foundation stone of his style of trading - Neuro Behavioural Technical Analysis. Vijay trains other professional traders. He is empaneled with the BSE & NSE as a visiting faculty for various finance market courses. He created the early course content for the Diploma in Commodity Markets (DICM), certified by the Forward Markets Commission. He was a training mentor at the MCX between 2005-2009. He is the first author to have his book - A Traders Guide to Indian Commodity Markets published by CNBC Publishing 18, in 2009 - approved and sponsored by the NCDEX. Vijay has done over 8,000 TV shows in the last 17 years and has written over 4,000 columns/articles in the print and electronic media. He is one of the first columnists to write a weekly column in the English language print media after the commissioning of the MCX, via his columns in the DNA Money, Business Standard and others.

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