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Will the NOPEC act collapse oil prices?

13 Mar 2019 13:55|Marcin Lipka

"The return to the NOPEC legislation by the US Congress has caused panic among oil-exporting countries and oil industry representatives. Will fuel prices fall drastically because of NOPEC?" writes Marcin Lipka, Conotoxia Senior Analyst.

Last Monday, during a meeting of the main oil industry representatives in Houston, USA, some important words have been addressed. According to Bloomberg, Suhail Mohammed Al Mazrouei, UAE oil minister and former OPEC chairman, said that "if the so-called NOPEC act becomes a law, the cartel will stop working and all its current members will increase production to maximum levels causing the price of oil to collapse."

During the CERAweek in Houston (organised by IHS Markit) representatives of the largest oil companies outside the cartel expressed a similar opinion. What is NOPEC and why are the plans to introduce this law beginning to keep the oil giants awake at night?

Extension of a law dating back over 100 years

According to a study by the Congressional Research Service (CRS), the NOPEC (No Oil Producing and Exporting Cartels) Act extends the antitrust law of 1890 (Sherman Antitrust Act) to foreign entities that "restrict production or distribution, maintain prices, restrict trade in crude oil, natural gas, petroleum products (e.g. gasoline) in a way that affects the prices of these goods."

OPEC countries may be afraid that the act will grant the United States a strong influence on the production volumes of the cartel members or even lead to the disintegration of the entity. Then the oil producers, who are now restricting production to maintain relatively high prices, would start extracting oil to power, causing prices to fall.

The Financial Times study ("Opec faces fresh treat from US legislation") also highlights that the law has already made an impact before it is even adopted. According to FT, one of the reasons for Qatar's withdrawal from the cartel in December last year was the potential negative consequences of NOPEC. The FT reports that Qatar is the majority shareholder (70%) of the 10 billion USD Golden Pass LNG project, which aims to build an export infrastructure for liquefied natural gas from Texas.

Perfect timing for Americans

Although the idea of "pushing" the OPEC cartel under antitrust law is not new, the Americans had previously had worse conditions for its implementation. Most of all, they were dependent on oil from the Persian Gulf, so such an initiative could quickly turn against them.

Now, due to the shale revolution, the United States is becoming almost energy independent, for this reason they should not complain about the shortage of raw materials. Even if they do not fully benefit from NOPEC's legal possibilities, their impact on the cartel may be visible, and eventually, we will see lower, rather than higher, oil prices.

Higher chances for lower fuel prices

Actions related to NOPEC is also positive news for Polish drivers. If the act was quickly implemented, it could cause a real collapse in oil prices and, consequently, in fuel prices. Probably the situation from 2014-2015 would be repeated, i.e. a drop in the price of Brent oil below 30 USD per barrel (currently costs 67 USD). The result would be sharp cuts in fuel prices at Polish stations, which could even amount to 1 PLN per litre.

However, a more probable scenario is that the Americans will make moderate use of the threat posed by the NOPEC act and will force the cartel to intervene less in maintaining abnormally high prices. In general, this will reduce the risk that prices at Polish stations will exceed current levels and increase the chances of small decreases when global oil stocks are high.

13 Mar 2019 13:55|Marcin Lipka

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