On Wednesday, the Organization of the Petroleum Exporting Counties (OPEC) concluded its meeting in Vienna, Austria with the announcement that it would set 30 million barrels per day as its target for oil production.
The cartel, whose 12 members provide one third of the world’s black crack.. err, I mean oil supply, decided to change the ceiling for the first time three years. Its previous limit of 24.5 million barrels per day was set in 2008 when the financial crisis hit and the global economy and oil prices slumped.
So what made them decide to change it now?
Well, it seems like a little bit of peer pressure got to OPEC members. You see, rich oil importers have been asking to maintain oil supply amid slowing economic activity. Before it became official, both the OPEC and the International Energy Agency (which represents some of the world’s biggest oil consumers such as the U.S., Germany, and Japan) announced that OPEC would need to pump out AT LEAST 30 million barrels of oil per day to rebuild stocks.
Other than that, the OPEC also acknowledged that Libya is fast recovering from its armed conflict. It was said that the country is currently producing 1 million barrels per day. At the rate that it’s going, it would be pumping out 1.3 million barrels per day by the end of 2012.
Now, you might be asking yourself, “Why is this important? Why is Forex Gump telling me all this?”
The agreement between the OPEC members shows that there is unity among them. This is a very welcome improvement from the OPEC’s June meeting when they failed to come to a resolution on oil production levels.
On the one hand, Saudi Arabia wanted to increase production to combat the rising oil prices that had been fueling global inflation. On the other, Iran and other members wanted to keep production as is.
The market, in response to the decision OPEC’s decision to increase oil production, together with the uncertainty surrounding the debt crisis in Europe, sent oil prices lower. The price of crude oil, for instance, dropped below the 95.00 level from just shy the 100.00 level.
After all, in a competitive market, the unit price of a particular good – oil in this case – will normally settle in a point where the quantity demanded by consumers (demand) will be equal to the quantity supplied by producers (supply). If supply could potential increase and demand remains unchanged, then it would lead to a lower price and higher supply.
Since oil prices are closely linked to the Loonie (the School of Pipsology covers this topic very well – I suggest you check it out), I think it’s reasonable to expect we could continue to see the Loonie lose ground versus the Greenback in the long-term. But of course, that’s just MY take on the matter.
But I want to hear your thoughts on the matter. Do you think the OPEC’s decision will have a big impact on the Loonie’s value?