Oil drops to $74 per barrel leading up to OPEC meeting

Oil prices plunged precipitously on Tuesday, just days ahead of a closely watched meeting by OPEC nations that seems likely to decide the price of oil in the short term at least.

A barrel of the North American benchmark oil known as West Texas Intermediate set a new low of $74.06 a barrel on Tuesday, down by almost $2 on the trading day.

Oil prices were flirting with $100 this summer before a steady decline based largely on huge new amounts of oil coming online from U.S. shale deposits.

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America produced more oil than Saudi Arabia last month the first time that's happened since the 1970s. That sudden glut of oil is playing havoc with the always unpredictable oil price. Traditionally, one of the main levers in getting prices to stabilize has been OPEC, the Organization of Petroleum Exporting Countries.

OPEC pumps out more oil whenever they see fit, and they've been known to turn off the taps when prices are too low for their liking. But their influence has waned in recent years as non-OPEC nations in Western Europe and North America have stepped up production in part so they won't be as vulnerable to OPEC's vagaries.

The U.S. produces 75 per cent more oil than it did six years ago, or more than three million barrels a day an amount that's bigger than the total output of every OPEC nation except Saudi Arabia.

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Traditionally, the Saudis have been the leader of OPEC, which collectively pumps out 30 million barrels per day. But the wild swings in prices have exposed cracks in OPEC's foundation, as member nations have wildly different goals.

Some countries, like Iran, Venezuela, Nigeria and Angola need oil prices well above $100 to meet their targets for government revenues set in their budget estimates. Others, like the Saudis, Qatar and Kuwait, can afford prices to be a little lower for longer.

It's believed the Saudis are OK with oil prices this low for now, because that will put a lid on any more development of U.S. oil deposits. And lower prices are also bad news for Russia and Iran, two countries the Saudis are trying to extract major concessions from at the moment.

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Other OPEC countries will be less willing to sit idly by while their main and sometimes only export craters in value. So while the Saudis will be pushing for patience, smaller nations will want a production cut. Still another option is that the cartel might agree to increase or decrease supply but then turn around and secretly break their own rules anyway.

"The idea that this is a cartel that places meaningful restrictions on its members' behaviour is fiction," says Jeff Colgan, a political science professor at Brown University's Watson Institute who studies OPEC. "OPEC countries do exactly what we would expect them to do if there were no such thing as OPEC."

OPEC will meet Thursday and Friday of this week in Vienna to come up with their latest strategy. The outcome of that meeting is likely to at the very least influence oil prices one way or the other, at least in the short term.

"They have quite a task in front of them," says Bhushan Bahree, senior director for OPEC and Middle East research at the analysis firm IHS. "They have to decide how much room to make, if any, for North American supply growth."

AsJudith Dwarkin, chief oil economist at ITG Investment Research put it: "It could be that the price rout has some more room to run."