Members of the Organization of the Petroleum Exporting Countries plus (Opec+), an entity that includes the largest OPEC member and non-member nations, recently decided to shift gears concerning its oil output strategy and produce more oil over the forthcoming months.
The expanded cartel announced that it will gradually introduce up to 2 million barrels of oil, starting from May 2021, till July 2021. More specifically, Opec+ will add back 350,000 barrels per day in May, 350,000 in June, and 400,000 in July.
Strategy Shift
In the initial days of the pandemic, the global energy group cautiously reduced oil output to stabilise the commodity’s market. Following this, a gradual return to regular production rates was seen in December of 2020, with Opec+ agreeing that it would increase output by up to 500,000 barrels per day each month; however, after initially increasing production in January 2021, it held back from further increases as global energy demand was difficult to predict due to the uncertain pandemic recovery.
Saudi Arabia, which controls about one-third of Opec’s total oil reserves, plays a leading role in the organization. The nation’s energy minister, Abdulaziz bin Salman, warned that the change in strategy was premature as the pandemic has not stabilised, as evidenced by third waves across Europe, followed by governmental lockdown measures in countries like France.
Despite this, Opec+ has speculated that the pandemic recovery is recovering, in particular, due to the successful vaccine rollouts in various jurisdictions. Nevertheless, Abdulaziz bin Salman conceded and suggested the new oil output strategy was merely a cautious and conservative measure.
As a result of the announcements, crude oil was trading at $61.28 per barrel, a 3.6% increase. Simultaneously, Brent crude rose 3.1% per barrel to $64.66.
The context
Some factors that influenced oil demand, and possibly the decision by Opec+ are the spikes in oil prices seen following the attack on Saudi Arabia’s oil facilities by the Houthi rebels in Yemen. Additionally, the recent Suez Canal crisis caused by Ever Given, caused crude oil prices to rally, though this quickly fell once the container ship was freed.
Moreover, there is some speculation that economic stimulus measures from governments in nations like the United States and Britain, in conjunction with successful vaccine campaigns, may have provided an optimistic outlook for fuel demand.
A difficult balancing act
Opec+ has a difficult objective; the group must speculate on the pandemic’s outcome to ensure a recovery of oil prices, a commodity that is nearly 25% lower in value year-to-date. It is imperative Opec+ proceeds with caution, and essential the group “gets it right”; if production levels are raised and demand does not rise with it, oil prices will fall drastically in an already grim financial year for the commodity.
Conversely, if production levels are lowered, oil prices will surge and act as an additional hurdle for governments in a financially demanding period. An example is an effect this may have on India; as a nation that imports close to 85% of its oil, a dollar increase in oil prices permanently would add $1.4 billion to India’s government spending.
Opec+ is indeed caught between a rock and a hard place. With major global leaders like the United States placing pressure on the group to ensure energy costs do not skyrocket in the forthcoming months, and clarity of the pandemic’s recovery trajectory getting blurrier every day, the group is faced with a task that is equal parts difficult and vital.
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