Signs are mounting that OPEC could break down

Bloomberg is out with a story saying that OPEC+ has reopened the debate on members’ output capacity, weighing on oil prices.

The problem is that some countries –namely the UAE — are investing in pumping more. The story also names Kazakhstan, Iraq, Kuwait and Algeria as others.

The way quotas are set at OPEC is around capacity. If capacity is static, then everyone can take a 10% cut and it’s fair. But if someone boosts capacity by 10% in the interim, now they’re effectively taking a 20% cut. Conversely, if a country loses 10% of its production, it’s effectively pumping full-out.

It’s never entirely clear what anyone’s true capacity is, sometimes even to the oil ministers themselves.

There are incentives for countries to game the system and claim more capacity than they really have but in other cases, rising capacity is real. The debates can be tough because the players don’t trust each other.

Keep in mind that the latest period of OPEC co-operation is almost unprecedented and there is a long history of cheating and the cartel breaking down. Could we be at that point? I think we could and that’s why it’s better to be cautious on oil, at least until after the June 1 OPEC meeting.

This article was written by Adam Button at www.forexlive.com.