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 November 17, 2014
Pressure mounting on OPEC nations to cut production

 

Oil prices fell again Monday morning as pressure mounts on members of OPEC ahead of the cartel's November 27 meeting in Vienna. With prices at four-year lows, OPEC may be forced to curb supply.

Leading members of OPEC have previously resisted calls to cut production as oil has fallen into a bear market. Most member nations of OPEC rely heavily on revenues from oil to support economic growth and spending. A decrease in global demand and the boom in U.S. shale have pushed prices down more than 25% since June.

But unity among OPEC's 12 member countries is in question ahead of next week's meeting, and speculation is building that they are going to announce production cuts. Over the weekend, Kuwait's cabinet and Supreme Petroleum Council held a meeting to consider options to halt the slide in prices. It's a sign the nation is becoming increasingly concerned. Last week, Kuwait's oil minister said he didn't think there would be a reduction in output by OPEC at the Vienna meeting.

On Sunday, Iran's oil minister also expressed concern over OPEC members who are trying to justify keeping production at current levels, according to CNBC. Iran has already had to tap into its sovereign wealth fund because of the oil price slump.

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Saudi Arabia, which is seeing increased competition from non-OPEC nations like the U.S. and Russia, has hinted it might agree to cut production if other nations do too. In other words, the Saudis don't want to lose market share if they agree to cut.

"This is not your father's OPEC," says Yahoo Finance Editor-in-Chief Aaron Task. "There is a lot of dissention within the ranks of OPEC," Task says. "Saudi Arabia is very sensitive to the fact that in the 1980s a few times we had these cases where they cut production to try to stem decline in oil prices and other members of OPEC didn't follow along."

The International Energy Agency said last week crude's drop below $80 a barrel would likely continue. The IEA, which expects demand to continue to weaken, said, "Barring any new supply problems, downward price pressures could build further in the first half of 2015."

However, an analyst note from Morgan Stanley projects OPEC will trim production targets and also predicts demand to firm up in 2015 because of cold weather.

But how long can a boost in demand last? It's something the OPEC members will need to hash out next week. Japan's economy has unexpectedly fallen into recession. China's economy is slowing. Europe is facing numerous challenges and a further drop in demand is possible.

"'Have we found a floor?' is the question they have to answer," says Task.