Commodity Trading:
Crude Oil Futures
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Supply
/ Production Considerations
One
of the major influences on the supply of Crude Oil is the Organization of
Petroleum Exporting Countries, or OPEC.
In the early 1970’s, the ownership of oil production in the
Middle East transferred from the operating companies to the governments of
the oil producing nations, or their national oil companies.
It was in 1973, when OPEC began to have a major influence on the
price of Crude Oil. Through
limitation of production by a quota system, OPEC was able to curtail
production and drive prices up. From
the 1973 price level of $7 a barrel, prices rose roughly 400%, in less
than a decade, to $34 a barrel.
OPEC’s
dramatic success in increasing oil prices also has cost it a lot of
influence in recent years. Higher
Crude Oil prices have allowed new sources of supply to be brought on line.
For example, in the mid-1970’s, OPEC production of Crude Oil
accounted for roughly two-thirds of the world oil supply.
According to recent American Petroleum Institute statistics, OPEC
countries account for roughly 40% of the world’s daily Crude Oil
production. OPEC countries
produce roughly 27.8 million barrels Crude Oil a day, while non-OPEC
countries produce 42.1 million barrels a day.
The following countries are OPEC members: Algeria, Ecuador, Gabon,
Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the
United Arab Emirates, and Venezuela.
In
early 1999, OPEC regained much of its political power back by effectively
slashing production, coordinating its efforts with non-OPEC countries.
The effectiveness of OPEC's new quota system can be seen by the
fact that Crude Oil prices more than doubled in 1999.
Though this was not the first introduction of a quota system from
OPEC in the last decade, the 1999 Quota system is the first in several
years that has been honored by OPEC and non-OPEC members alike.
As long as OPEC countries continue to honor these quotas, the price
of Crude Oil should stay above the targeted $18.00 a barrel, set in
February 1999. However, the
effectiveness of OPEC may be its own undoing, as well.
Relations
have been strained in recent years between the United States and NATO
countries with several OPEC member countries.
These political influences have a major effect on the price of oil.
Trade embargoes on oil producing countries can have major
ramifications on the price of Crude Oil.
Political factors in non-OPEC countries are also very important.
The former Soviet States are major producers of Crude Oil, making
that political climate weigh heavily on the supply of oil and its price.
The
United States is a major producer and importer of oil.
In recent years, America has become quite aggressive in using its
political clout and muscle to impose trade sanctions.
The continuing saga with Iraq is a perfect example, where Iraq is
allowed to produce about 2 million barrels of oil a day; they allow the
United Nations' arms inspectors to monitor their weapon facilities. If Iraq breaks this agreement, then Iraq is subject to
embargo or a halt to all trade with all United Nations members.
The
recent cooperation of OPEC and non-OPEC producers in regulating the supply
of oil to maximize costs should continue, and be an integral part
of the Petroleum market for the next several years.
Solidifying this relationship should help bolster prices, while
"in-fighting" should weigh on prices.
For the last 18 months OPEC and non-OPEC countries have gotten
along without a hitch, which is unprecedented.
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