What Is OPEC+ and How Does It Affect Oil Prices?
Yesterday, March 2nd, OPEC+ held its 26th Ministerial Meeting, with the participation of non-member petrol-producing countries, to decide on changes to output in the current market environment. Notwithstanding the unstable geopolitical situation currently engulfing Russia, one of the world’s top Oil (CL) producers, OPEC+ announced yesterday that it would stay on its current course of slowly increasing production.
What is OPEC?
Many traders may be confused by the various references to OPEC and OPEC+ in the media. The original Organization of Petroleum Exporting Countries, which still boasts thirteen member nations, was formed in Baghdad, Iraq in 1960. This intergovernmental organisation was created in order to coordinate global petroleum production so as to prevent price crashes in times of low Oil demand. Although the industrialised world has reduced its dependence on OPEC+ supplies since the energy crisis of the early 1970s, the organisation’s decisions still have the ability to greatly affect the global economy, such as when members coordinated production cuts during the coronavirus epidemic.
In 2016, OPEC added ten allied countries, including Russia, which now presides over the organisation along with Saudi Arabia, and henceforth became known as OPEC+. This fateful decision came in the wake of an Oil price drop caused by slowing commerce and a jump in U.S. domestic shale Oil output.
The twenty-three members of the supercartel now collectively produce the majority of the world’s Oil, and hold 90% of proven Oil reserves. With the majority of global petroleum production now coordinated via OPEC+, the group’s decisions have a great influence on the international economy.
Why Is OPEC+ Important?
The interests of OPEC+ are to maintain Oil’s price per barrel from falling below a certain threshold. This is important to member countries, since the economies of some, such as Russia and Saudi Arabia, are heavily dependent on Oil revenues to function. At its summits, held biannually or more often, member states must balance geopolitical and economic concerns in their predictions for how Oil demand will move in the near future, and coordinate production accordingly.
At times, OPEC+, having assessed the state of the global economy, foresees decreased growth or a recession, and therefore a drop in Oil demand as need for energy falls. In cases like these, the members agree to cut production in order to keep supplies tight and prop up the price per barrel, such as when an output drop of 3 million barrels per day was coordinated at the height of the Great Recession in 2009.
Conversely, when economic growth or recovery seems to be in the cards, OPEC+ countries can increase their petrol output to satisfy demand without endangering ever-important prices. Thus, the decisions made at OPEC+ meetings in Vienna, or via videoconference as was the case yesterday, albeit sometimes accompanied by intra-organisational controversy, affect operating costs for energy-hungry industries the world over.
How Has OPEC+ Acted During the Pandemic?
As the COVID-19 pandemic caused a global economic depression on a scale unseen since the 1930’s, OPEC+ members faced a dilemma with regard to coordinated petroleum production. In response to increasing restrictions implemented across developed nations, OPEC+ was forced to downgrade its Oil demand forecast in early 2020.
On April 12th of last year, the supercartel moved to cut petrol output by nearly 10 million barrels a day. The previous month, Russia and Saudi Arabia had failed in attempts to agree on production cuts, causing the price of Oil to drop by more than half over the five weeks preceding the April 12th decision. However, the drop in output lagged in its intended effects, and the price of Oil fell below $0 for the first time in history before rebounding in the early summer, leading OPEC+ to moderate production cuts to 7.7 million barrels per day.
Over the following months, the Chinese and Japanese economies proved more resilient than that of Western countries; by November, American and European demand was still nearly one-third below pre-pandemic levels, while Asian demand was only 10% under what it had been prior to COVID-19’s spread. Although Pfizer’s (PFE) announcement that its proprietary coronavirus vaccine had passed trials caused Oil to begin rising again, as a whole, its price per barrel dropped by nearly 21% over 2020, while that of petroleum benchmark Brent Oil marked a 22% loss for the year. Energy firms were also hit hard by the first year of the pandemic, with ExxonMobil (XOM), Chevron (CVX), and BP (BP-L) collectively losing tens of billions as 2020 drew to a close.
2021 provided some relief to OPEC+’s member states, with eased travel restrictions and increasing vaccination rates brought global demand back to pre-pandemic levels by February. In July, the supercartel came to an agreement to increase production by 400,000 barrels a day, gradually phasing out COVID-era cuts by April 2022. Despite the continuing challenges posed by the coronavirus’ Delta variant, Oil’s fortunes improved, with the price per barrel reaching a three-year high of over $80 in late October, and energy giants such as Royal Dutch Shell (RDSA-L) and Total (TTE.PA) posting their highest cash flows in over a decade. The discovery of yet another COVID-19 strain, Omicron, caused fears of a recurring economic recession to bring Oil demand down significantly in late November and early December, but this time recovery was much quicker, with prices rebounding by nearly 15% over the last month of 2021.
As we’ve moved further into the new year, the global Oil market has faced unforeseen challenges, and in January, black gold’s price per barrel reached heights not seen in years. Geopolitical tensions in the Persian Gulf raised questions among market analysts whether a coming supply disruption was in the cards; little did they know that a conflict in another region of the world would soon send the price of Oil skywards.
How Did OPEC+ Come to Its Recent Decision?
In 2021, OPEC+ faced pressure from nations such as the United States and India to increase production limits in order to satisfy demand produced by a rebounding economy, eventually giving in to President Joe Biden’s request for increased petrol output to satisfy American consumers. However, a few important factors led some market experts to predict that the supercartel would proceed on its current path of 400,000 daily barrel hikes rather than restoring production at an even quicker pace or keeping cuts at their present level.
Despite the United States’ increased production over recent years, American crude stockpiles are already dwindling as the economy heats up. Furthermore, Omicron’s impact on economic activity has proven to be rather minor in comparison with those caused by Alpha and Delta, and travel necessitating fossil fuels has increased throughout Asia.
However, the global economy has apparently pulled a wild card. Any trader who’s been following the news lately is surely aware of the continually intensifying crisis between Russia and Ukraine in Eastern Europe. The expanding raft of sanctions on the Russian Federation, as well as the divestment of fossil fuel giants BP and Exxon from the country this week have led many to wonder if the supply of petroleum westward from Russia could be cut off in the near future. Already, suppliers are having difficulty securing the insurance or financing necessary to get their product to market. Furthermore, a large proportion of Russia’s Oil could soon be devoted domestically to military use, further pushing supply down.
The prices of both Crude and international benchmark Brent Oil (EB) have continued to push upward. As of the time of writing, both were trading up by 4%, with Oil at prices unseen since 2008. This comes in spite of the Tuesday release of 60 million barrels from strategic reserves orchestrated by the International Energy Agency (IEA), an organisation that counts major powers like the United States, Germany, and Japan, among others, as members.
So far, Western sanctions have not targeted crucial Russian Oil and Natural Gas (NG) exports. However, even a short-term disruption to these supplies could push inflation in Western economies to rates unseen in decades.
OPEC+ members seemed unswayed by these concerns following the cartel’s summit on Wednesday; members agreed to raise output by 400,000 barrels a day over April as previously determined. According to OPEC+’s estimation, Oil’s recent sharp price rises should not be attributed to market fundamentals, but rather to the developing crisis in Ukraine.
In conclusion, OPEC+ has yet to change its decision rationale in response to changing market conditions. Only time will tell whether a major disruption to global petroleum markets is in the cards, or if Oil price increases will return to a more stable rate.
