The Organization of the Petroleum Exporting Countries and its allies (OPEC+) agreed to maintain their voluntary oil output cuts for another six months, boosting oil prices and tightening the global market.
Why OPEC+ decided to keep the cuts
OPEC+ members, led by Saudi Arabia and Russia, met on Tuesday to review their production policy for the second quarter of 2024. The group faced a dilemma: whether to increase output to meet rising demand and ease consumer pain, or to keep the cuts to support prices and their revenues.
The group chose the latter option, citing the uncertainty and volatility in the oil market, as well as the ongoing geopolitical tensions in the Middle East and North Africa. OPEC+ said in a statement that it would continue to adjust its production levels “in a monthly manner” to ensure market stability.
The decision came as a surprise to many analysts and traders, who had expected OPEC+ to ease the cuts by at least 500,000 barrels per day (bpd) in April. The group had already boosted its output by 2.1 million bpd since January, after slashing it by a record 9.7 million bpd in 2020 to cope with the demand collapse caused by the coronavirus pandemic.
How the market reacted to the news
The news of the extended cuts sent oil prices soaring to their highest levels since late 2023. Brent crude futures, the international benchmark, rose by $1.04, or 1.2%, to a session high of $83.57 a barrel at 1:05 p.m. ET (1805 GMT). U.S. West Texas Intermediate crude futures (WTI) were up 1.02 cents, or 1.3%, at $78.63.
The market was already tight due to the strong recovery in oil demand from China, India, and Brazil, as well as the supply disruptions in the U.S., Libya, and Iran. The U.S. suffered a major outage in February when an Arctic blast shut down up to 4 million bpd of production in Texas and other states. Libya’s output has been hampered by political instability and security threats, while Iran’s exports have been curbed by U.S. sanctions.
The extended cuts by OPEC+ will further squeeze the available supply, especially for the heavier and sourer grades of crude that are favored by many Asian refiners. This could widen the price gap between the lighter and sweeter grades, such as Brent and WTI, and the heavier and sourer ones, such as Dubai and Urals.
What this means for the global economy
The higher oil prices will have mixed effects on the global economy. On the one hand, they will benefit the oil-producing countries, especially those that rely heavily on oil revenues, such as Saudi Arabia, Russia, Iraq, and Nigeria. They will also boost the profitability of the oil and gas industry, which has been struggling with low margins and high debts.
On the other hand, they will hurt the oil-consuming countries, especially those that are net importers of oil, such as China, India, Japan, and the European Union. They will also increase the inflationary pressures and the costs of transportation, manufacturing, and agriculture.
The higher oil prices could also pose a challenge for the global efforts to combat climate change and transition to a low-carbon economy. They could reduce the incentives for consumers and businesses to switch to cleaner and cheaper sources of energy, such as renewables, hydrogen, and electric vehicles.
The outlook for the oil market
The outlook for the oil market remains uncertain and dependent on several factors, such as the pace and effectiveness of the COVID-19 vaccination campaigns, the level and duration of the OPEC+ cuts, the supply and demand dynamics in different regions and sectors, and the geopolitical and environmental risks.
According to the International Energy Agency (IEA), global oil demand is expected to grow by 5.4 million bpd in 2024, after falling by 8.8 million bpd in 2020. However, the IEA warned that the recovery is “fragile” and “uneven”, and that there is still a “significant excess capacity” in the market.
The IEA also said that the global oil supply is expected to increase by 1.6 million bpd in 2024, after declining by 6.6 million bpd in 2020. However, the IEA noted that the supply growth is “concentrated in a few countries”, and that there is still a “large degree of uncertainty” about the future production levels of OPEC+, the U.S., and other non-OPEC countries.
The IEA concluded that the oil market is “far from out of the woods”, and that it will require “close monitoring and careful calibration” of the policies and actions of the producers and consumers.
Source: Reuters
