?OPEC may be on the verge of a major meltdown itself, according to Bernstein Research senior analyst Neil McMahon.


“We believe the extreme differences within OPEC could tear the organization apart in the near term, leading to Saudi Arabia pursuing a more moderate course with a few others, while the hawks (Venezuela and Iran) focus on self preservation,” McMahon says. “Maybe the cartel will remain in name, but its influence as a group could soon be called into question.”


He suggests OPEC members are acting cluelessly.


“These were the sorts of thoughts running through our heads in September when it was clear that OPEC, or some of its members, were currently residing on another planet, unaware of the bigger picture and what was happening in the market place,” McMahon says. “By asking for a cut in supply while the economy and the market were heading south, and increasing the possibility of oil prices going back up while the world was slipping into recession, was an act lacking in any apparent reason.”


On September 10, OPEC agreed to cut overproduction exceeding the agreed output quotas. Since then, oil prices have dropped by $18.54 per barrel to below $80 at one point on October 10. Several members, including Iran, have asked for lowering output quotas to prop up prices.


In a message on its website, the organization reports an extraordinary meeting of the cartel has been called for November 18. OPEC reports, “The organization reiterates its determination to ensure that oil-market fundamentals are kept in balance and market stability is maintained.”


McMahon says OPEC now is not an organization speaking with one voice.


“Rather, it was a small faction in the membership who are extremely worried about how they will meet their budgets next year,” he says.


“Notably, Saudi Arabia has not joined the OPEC hawks, led by Venezuela and Iran, in calling for another supply cut, and we think we could be witnessing the beginning of the end for the organization.”


McMahon says his forecast is not one being made lightly.


“Predicting the end of one of the most powerful drivers in oil supply and demand, as well as the price, for nearly the last 50 years may be a stretch, but arguably there have been few times when the outlooks of OPEC, and that of its main customers, have been in completely different directions,” he says,


Parts of OPEC appear to want a “fair” price for crude, so that they can still fund their growing budgets in countries where inflation is running at 20%-plus.


“But we believe other parts of OPEC, such as the Saudis, are logically thinking about their own market share within the organization, and how to preserve oil’s market share amongst the energy choices their main customers have,” McMahon says. “From the consumer’s side, the last thing we want now are oil prices going back up again, putting upward pressure on inflation and prolonging the now likely global recession we are going into.”


He adds that Libya and Algeria seem to be backing the OPEC hawks that a cut is needed at their November 18 meeting.


“The calls for a cut raise many questions for the organization, which go to the very heart of its existence,” McMahon says. “Should OPEC be the mechanism that helps the world’s economy tick over by maintaining a balanced market, or should it be in existence to preserve the recent fortunes of some of its hawkish members?


“Saudi Arabia needs to decide what the answer is, if OPEC is to survive in its current form going forward.”

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