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Why OPEC may have to cut production eventually

Saudi Arabia and OPEC, the 12-member oil cartel of which Saudi Arabia is the most influential member, has insisted on maintaining its oil-production targets despite the recent decline in prices. Above, Saudi Oil Minister Ali al-Naimi speaks to journalists.

The Organization of the Petroleum Exporting Countries?is not expected to cut production now, but it might have no choice later this year if oil begins to fall again, says Jasper Lawler, a market analyst at CMC Markets UK.

\”While OPEC will probably stay the program in June, if oil prices are still low 6 months later at the next meeting, infighting amongst OPEC members under pressure to raise state revenues could make the decision less clear,” he explained in a note to clients.

Lawler said OPEC won the first battle in the war with higher-cost non-OPEC countries when it chose not to cut production in November.

The decision, which sent oil prices to as little as US$40 a barrel from US$70 a barrel, would be a win for OPEC since it forced the competition – specifically U.S. shale – to pare back production, he explained, but it also came at the cost of taking a \”huge bite out of the national revenues of oil-producing countries.\”

Oil prices have rebounded recently, but several headwinds remain, together with a strong U.S. dollar and slowing demand from China, each of which could make OPEC reconsider its position later around.

\”Even if U.S. oil production does come down, until you will find widespread defaults amongst U.S. firms, it is likely to be a gradual reduction,\” he explained. \”U.S. dollar strength along with a global growth slowdown particularly in China both have the potential to weigh on the price of oil.\”