The next OPEC meet­ing is cru­cial for the di­rec­tion of oil prices

Crude prices are al­ready los­ing mo­men­tum head­ing into key sum­mit

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In just over two weeks oil pro­duc­ers’ car­tel OPEC will hold its lat­est meet­ing in Vienna (22 Jun), an event that could have a ma­jor in­flu­ence on the di­rec­tion of oil prices.

Oil prices have al­ready started to re­treat from re­cent highs above $80 per bar­rel ahead of this sum­mit. Why? There is spec­u­la­tion lead­ing mem­ber Saudi Ara­bia could boost its pro­duc­tion amid dis­rup­tions to sup­ply in Venezuela and Iran.

WHAT IS OPEC AND WHY DOES IT MAT­TER?

The Or­gan­i­sa­tion of the Petroleum Ex­port­ing Coun­tries (OPEC) is an in­ter­gov­ern­men­tal or­gan­i­sa­tion of 14 oil pro­duc­ing coun­tries. The car­tel is dom­i­nated by Saudi Ara­bia.

In 1973, dur­ing the Yom Kip­pur war when Is­rael lined up against Egypt and Syria, Arab mem­bers of OPEC re­fused to ship oil to west­ern coun­tries which had sup­ported Is­rael. This prompted a four-fold in­crease in the price of oil.

Though its in­flu­ence has waned in the in­ter­ven­ing 40-plus years it still ex­erts a mea­sure of in­flu­ence over the short and long-term di­rec­tion of the crude oil mar­ket – con­trol­ling around 80% of the world’s proven crude oil re­serves.

OPEC sets quo­tas, which de­ter­mine how much mem­ber coun­tries should pro­duce, al­though com­pli­ance is of­ten a long way short of 100%.

WHAT ARE PEO­PLE EX­PECT­ING FROM THE MEET­ING?

In the spring it was sug­gested the Saudis would be com­fort­able with an $80 per bar­rel oil price but with oil now around this level and amid com­plaints from the US, there are sug­ges­tions the Saudis may re­spond by in­creas­ing out­put. That could push the price down. US pres­i­dent Don­ald Trump ex­plic­itly crit­i­cised the group in a Tweet on 20 April when he de­scribed ‘ar­ti­fi­cially’ high prices as ‘no good’ and said they ‘will not be ac­cepted’. Eco­nomic tur­moil in Venezuela and the US exit from the nuclear deal with Iran, bring­ing with it the re­newed threat of sanc­tions, is putting pres­sure on oil pro­duc­tion in both coun­tries.

The Saudis are the ones with the spare ca­pac­ity to boost out­put, but they may face op­po­si­tion from the rest of the car­tel who have lit­tle to gain from fall­ing oil prices.

They may also look to part­ner with Rus­sia again, hav­ing an­nounced co­or­di­nated cuts back in Novem­ber 2016. Bro­ker Can­tor Fitzger­ald com­ments: ‘Rus­sia is re­ported to have ex­ceeded its agreed pro­duc­tion quota last month, as both it and Saudi Ara­bia seek to fill the gap in car­tel sup­ply lost from the col­laps­ing Venezue­lan econ­omy.

‘With fears that OPEC may aban­don the pro­duc­tion quo­tas at the next meet­ing, some in­vestors are wor­ried that this would un­leash a wave of crude onto the mar­kets, which cou­pled with the rise in US pro­duc­tion, could push the mar­ket back into an over­sup­ply sce­nario once again.’

The oil price would prob­a­bly fall if the mar­ket be­comes over­sup­plied again. This is sig­nif­i­cant for UK in­vestors as the flag­ship FTSE 100 in­dex has a heavy weight­ing towards BP (BP.) and Royal Dutch Shell (RDSB) whose revenue, profit and cash flow is at least in part de­ter­mined by the price of crude.

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