OPEC and the Oil Commodities Market - dummies

OPEC and the Oil Commodities Market

By Amine Bouchentouf

The Organization of Petroleum Exporting Countries (OPEC) is made up of countries that are involved in the production and export of crude oil commodities around the world. Currently, OPEC has 11 member countries: Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates (UAE), and Venezuela.

Because OPEC’s members collectively hold about 65 percent of total crude oil reserves and produce 40 percent of the world’s oil, they have considerable influence on the markets.

OPEC’s members meet regularly at its headquarters in Vienna, Austria, to establish the course of action for its members. Because its members are key players in the global oil markets, any decision OPEC takes can significantly affect the price of oil on a global scale. One mechanism OPEC uses to achieve this influence is its quota system, in which individual members must follow pre-established production quotas.

OPEC quotas are an important statistic to regularly monitor because they dictate the level of oil production for some of the world’s most important oil producers. But even more important than the self-imposed quotas is the actual production from each member country, because that may differ from the quotas: Some countries, enticed by the high price of crude, are tempted to increase their production because this increases their profits.

Ironically, the production quota is partly responsible for the increased prices, meaning that prices decrease as production increases. You can keep track of regular developments from OPEC that may affect oil markets through the OPEC website. Although OPEC’s influence on the markets has diminished since the 1973 Arab Oil Embargo, it still wields considerable influence over the oil markets.

Traders pay a lot of attention to exports, but imports, which represent the other side of equation, are equally important. Countries that are main importers of crude oil are primarily advanced, industrialized societies like Germany and the United States. These countries are rich enough that they can absorb crude oil price increases, but as a general rule, the importers face a lot of pressure during any price increases.

This pressure sometimes translates into lower stock market performances in the importing countries, which means you need to be careful if you’re exposed to the domestic stock markets of these oil importers. Here are the top crude oil–importing countries of 2009:

Rank Country Daily Oil Imports (Million Barrels)
1 United States 1,012.2
2 Japan 4.9
3 China 3.7
4 Germany 2.3
5 South Korea 2.2
6 India 1.9
7 France 1.8
8 Spain 1.5
9 Italy 1.5
10 Taiwan 1.0

Source: United States Department of Energy