OPEC Quota Uncertainty to Have Impact on Oil Prices

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Oil revenues for companies like Exxon Mobil (NYSE:XOM) could be subject to considerable uncertainty for the rest of the year as member countries of the OPEC disagree on the best response to the drop in oil prices. Saudi Arabia, the largest oil producer in the bloc is pushing for higher output, to ease global prices, while some of the other countries are in favor of cutting production to boost prices. [1] Oil prices have declined steeply over the past month on higher output from Saudi Arabia and weak economic news from Europe and the U.S. Weak oil prices could have a drag on the earnings of oil majors such as Exxon, which earn a major portion of their income from global oil sales.

We have a $94 price estimate for Exxon Mobil, which is at a 20% premium to its current market price.

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OPEC decision

OPEC, which consists of a block of 12 oil exporting nations, wields considerable influence on the pricing of oil in international markets. Over the past, members of the bloc have coordinated to maintain strong revenues from oil exports. The body generally cuts production levels in times of weak global economic growth to prevent prices from falling excessively. However, Saudi Arabia, one of the key members of the block is resisting demands by some of the member countries to reduce output levels. [1] As the only OPEC country with significant spare capacity, Saudi Arabia has a history of pushing for lower oil prices to stroke more demand. However, countries like Iran and Iraq depend on high oil prices to drive revenues.

Presently, Saudi Arabia is pumping 1.8 million barrels per day (MB/d) over its production target, to boost OPEC production beyond the targeted 30 MB/d. [1] Higher production from the kingdom has resulted in a surplus, which is believed to have contributed to Brent prices falling from $128 in March to below $100 presently. OPEC is due to review its outlook this week, setting the stage for a confrontation between Saudi Arabia and the countries looking to reduce production.

Oil prices are crucial determinants for Exxon’s global earnings. If Saudi Arabia continues to flood the oil market with excess output, prices could fall further, lowering the company’s profits in the short term.

Like most OPEC countries, Exxon cannot ramp up output in the short term to make up for the decline in revenues. (Although lower prices help Exxon to increase output slightly because of the design of some of its production contracts) Oil companies are already under some stress because of low gas prices in North America.

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Notes:
  1. Saudi says OPEC may need higher output target, Reuters [] [] []