Herein this article, we’ll take a loot at how OPEC’s production level affects global oil price and what it means for the economy.
OPEC (Organization of the Petroleum Exporting Countries) production levels significantly impact global oil prices due to the cartel’s substantial market share.
OPEC+ regulates the supply of oil to influence the price of the commodity on the world market. The group can achieve this by coordinating supply cuts when the price is deemed too low and supply increases when its members believe prices are too high.
WHAT ARE OPEC AND OPEC+?
OPEC was founded in 1960 in Baghdad by Iraq, Iran, Kuwait, Saudi Arabia and Venezuela with an aim of coordinating petroleum policies and securing fair and stable prices. Now it includes 12 countries, mainly from the Middle East and Africa, accounting for about 30% of the world’s oil.
OPEC formed the so-called OPEC+ coalition with 10 of the world’s leading non-OPEC oil exporters, including Russia, at the end of 2016.
OPEC+ crude output represents about 41% of global oil production. The group’s main objective is to regulate the supply of oil to the global market. The leaders are Saudi Arabia and Russia, which produce and 9 million and 9.3 million barrels per day (bpd) of oil respectively.
HOW DOES OPEC INFLUENCE GLOBAL OIL PRICES?
Because of its large market share, the decisions OPEC makes can affect global oil prices. Its members meet regularly to decide how much oil to sell on global markets. As a result, when they lower supply in response to falling demand, oil prices tend to rise.
READ: GUIDE TO INVESTING IN OIL MARKET
Oil Price and Supply
As a cartel, the OPEC+ member countries collectively agree on how much oil to produce, which directly affects the ready supply of crude oil in the global market at any given time. OPEC+ subsequently exerts considerable influence over the global market price of oil and, understandably, tends to keep it relatively high to maximize profitability.
If OPEC+ countries are unsatisfied with the price of oil, it is in their interest to cut the supply of oil so that prices rise. However, no individual country actually wants to reduce supply, as this would mean reduced revenue. Ideally, they want the price of oil to rise while they increase supply so that revenue also rises.
However, that is not how market dynamics work. A pledge by OPEC+ to cut supply causes an immediate spike in the price of oil. Over time, the price reverts back to a level, usually lower, when supply is not meaningfully cut or demand adjusts.
Here’s how OPEC production affects oil prices:
- Supply and Demand Balance: OPEC’s production decisions influence the global oil supply, which in turn affects the balance between supply and demand. Increased OPEC production can lead to a surplus, lowering prices, while reduced production can create a deficit, driving prices up.
- Price Volatility: OPEC’s production changes can cause price volatility, as markets react to the perceived changes in supply and demand.
- Market Sentiment: OPEC’s production decisions can influence market sentiment, with increased production seen as bearish (negative) and reduced production viewed as bullish (positive).
- Inventories and Storage: OPEC production affects global oil inventories and storage levels. Increased production can lead to higher inventories, while reduced production can lead to lower inventories, impacting prices.
- Non-OPEC Production: OPEC’s production decisions can influence non-OPEC production, as other producers may adjust their output in response to OPEC’s actions.
- Global Economic Trends: OPEC production can impact global economic trends, as oil prices influence inflation, growth, and trade balances.
- Currency Markets: OPEC production decisions can affect currency markets, particularly for oil-exporting countries, as oil prices impact their exchange rates.
- Investment and Exploration: OPEC production levels can influence investment and exploration decisions in the oil industry, as stable or increasing production can attract investment.