Ferguson's Forecast: OPEC Is Now Irrelevant

On April 7, Saudi Arabia announced it would provide all the oil its customers requested. Predictably, oil prices tumbled from $56/bbl to close yesterday at $51.13. More importantly, the Saudi announcement means that there is no longer surplus oil production capacity in the world. Thus, the rationale for OPEC is now gone. We have come to the end of an era. OPEC, the Organization of Petroleum Exporting Countries, was constituted in 1961 to coordinate oil production by countries with surplus capacity. ?For OPEC and for Saudi Arabia, from now on, there are no [supply] constraints,? according to an OPEC official quoted in the Wall Street Journal . Any increase in the cartel?s production limits would be ?symbolic,? he said. OPEC has dominated global energy prices throughout my entire professional career. Although I have been expecting surplus oil production capacity to vanish, the end of an era of plentiful and inexpensive oil is nevertheless stunning. As oil prices dropped in recent trading, U.S. natural gas prices have also retreated. From its high of $7.75/MMBtu, the contract for May delivery fell below $7 before recovering to close at $7.07 yesterday. The average gas price for the coming 12 months is down as well but is still a hefty $7.62/MMBtu. A new era is dawning. Future oil prices will no longer depend on OPEC politics but on whether producing countries are willing and able to expand production despite depletion of their resources. Barring global economic collapse, it?s difficult to see how oil prices can fall and easy to see how they can rise. Gas prices can be expected to follow.

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Ferguson’s Forecast: OPEC Is Now Irrelevant

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