Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2019 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Oil prices at OPEC's mercy? - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

Oil prices at OPEC's mercy?

Dec 14, 2010

Commodity prices are generally governed by the economic forces of demand and supply. But for crude oil prices, the dynamics of economic forces are rather superficial. For long, the oil producing nations have used the pricing of this scarce commodity to their advantage. OPEC, a cartel of twelve nations, has close to 40% share of the world's oil supply and two thirds share of its known oil reserves. The body is prompt when it comes to raising prices due to supply shortage. At times the shortage is even an artificial one. But when it comes to enhancing supply to meet excess demand, the profit centric motives take over.

In a recent meeting aimed to decide on viable supply limits, OPEC left the quota same as before. Oil prices are now at two year high of US$ 90 a barrel. While this means more inflation in the economy and slower recovery from global recession, OPEC is fine with the current state of affairs. It has shrugged off the high prices as a 'blip' and has left the quotas on hold citing slowing demand and strong supplies. The current supply limit is in place since last two years. It was fixed when oil prices plunged from US$ 147 to US$ 33 a barrel. OPEC justified the status quo in supply citing lower demand due to potential debt crisis in Europe. This is in complete contrast to IEA's report projecting rise in demand for oil from the fast growing emerging economies. OPEC's stand makes it clear that it wants to make most of the strength in oil pricing. The cartel had earlier estimated a price range of US$ 70 to US$ 90 being 'bearable' for consumers which was changed to US$70-US$80 in the recent meeting. The 'bearable' price range is altered to suit the convenience and pockets of the oil producers. Hence the inertia in raising supplies even if the rise in crude prices erode growth for a major part of the world.

The group has around 6 to 7 m barrels of spare capacity, but it has not changed formal supply quotas. Going further, if the supply remains fixed, oil prices will stay firm and the recovery of developed nations will be slower. For India, which imports close to 70% of crude oil, this means huge losses for oil refiners and high deficits for the government.

In the wake of the current events, the only fact that can ease concerns is a hike in share of non OPEC oil producing nations. Oil prices could also ease if speculative investments are not made into the commodity. However, for companies that are large consumers of the commodity, hopes of better margins could remain a distant possibility.

Equitymaster requests your view! Post a comment on "Oil prices at OPEC's mercy?". Click here!


More Views on News

RELIANCE IND. at All Time High; BSE OIL & GAS Index Up 0.5% (Market Updates)

Apr 25, 2019 | Updated on Apr 25, 2019

RELIANCE IND. share price has hit an all time high at Rs 1,408 (up 1.2%). The BSE OIL & GAS Index is up by 0.5%. Among the top gainers in the BSE OIL & GAS Index today are RELIANCE IND. (up 1.2%) and BPCL (up 1.6%). The top losers include OIL INDIA (down 0.2%) and IOC (down 0.2%).

ONGC: Higher Volumes and Oil Prices Support Performance (Quarterly Results Update - Detailed)

Nov 3, 2017

HPCL Deal Remains the Known 'Unknown'.

More Views on News

Most Popular

This is Why the Stock of Jubilant FoodWorks Went Up 1,160%(The 5 Minute Wrapup)

Apr 12, 2019

This critical business strategy has enabled companies to scale their operations faster.

Pocketing Massive Gains with HDFC And HDFC Bank(Profit Hunter)

Apr 12, 2019

Here's how one could have generated gains of Rs 59,250 in 10 days by trading HDFC and HDFC Bank with a capital of Rs 4 lakh.

My Master Series on How to Trade Election 2019(Profit Hunter)

Apr 16, 2019

For 30 years he has watched how elections impact the markets, and practiced how to profit from it. Now he is here...telling you everything. Read on...

Election Series: Follow the World's Biggest Traders To See Where the Money Flows(The 5 Minute Wrapup)

Apr 17, 2019

20% of all the traders bring in 80% of the money. Watch these 20% and you get a working idea of which way the wind is blowing.

A Letter to You from India's No. 1 Trader(The 5 Minute Wrapup)

Apr 15, 2019

It's our great pleasure to introduce Vijay Bhambwani to our readers - we consider Vijay to be India's best trader. Read on to find out why...


Get the Indian Stock Market's
Most Profitable Ideas

How To Beat Sensex Guide 2019
Get our special report, How to Beat Sensex Nearly 3X Now!
We will never sell or rent your email id.
Please read our Terms


Apr 25, 2019 12:15 PM