OPEC is the organization responsible for regulating at least half of the world’s oil output, and as such has become significant in recent years, given the massive glut in oil supply which is currently plaguing the world and oil producing companies. Many of the member countries and the bulk of their oil reserves are Middle Eastern, and as such it is this region which is the most affected by OPEC’s decided quotas. Here are some of the ways OPEC output cuts may affect the region as a whole.
Since oil companies are unable to sell all the oil they are capable of producing, their profitability is at the risk of further limitations, whilst non-member countries can continue to sell as much oil as they can produce, ultimately contributing to the glut. This means that Middle Eastern companies will continue to suffer from low oil prices whilst only being able to sell a limited amount of their production.
Market players trading oil as a commodity, with CFD’s for example, will have to keep an eye on its market movements, as any production quota changes OPEC makes are likely to have a direct impact on oil price.
As a result of the oversupply and lower profitability, oil companies may have to continue cutting jobs across oilfields and shelving expansion plans. Although the cuts are unlikely to lead to any mass unemployment, it does make it difficult for oil producing companies to sustain employment levels in such market.
That being said, if OPEC output cuts push oil prices to higher levels, then crude producers should be able to afford more workers, and ultimately create more jobs. This should stimulate the economic growth of a number of oil producing economies and ultimately stabilize their financial positions.
Is There an End in Sight?
Oil is currently trading at $49.16 per barrel, which is certainly an improvement on the $30 it was trading at the start of 2016. If this trend continues, then oil could certainly begin to creep up in value once again.
There are, however, other factors at play, such as increasing American shale oil production adding even more to the global supply. Libya’s oil production is also posing a threat to OPEC’s measures, as it is exempt from any of their quotas in order to help it rebuild and boost its economy. All this considered, OPEC will certainly have its output cut in order to reduce oversupply, and the Middle East could continue to suffer more jobs cuts and revenues in order to achieve this.
Ultimately, OPEC output cuts are likely to cause the region some prolonged financial stagnation. The organisation’s measures, however, are necessary if oil producing countries plan to get closer to the profit levels of the pre- oil price crash era.