Oil-producing countries slowly open the taps again
The major oil-producing countries will slowly increase their own production in the coming months. That is the outcome of the consultation between the so-called OPEC+ countries, the group of oil producers of which Saudi Arabia and Russia are the two most important. Prior to the meeting, it looked like the countries would limit production even longer.
Since the start of the corona crisis, these countries have been pumping far less oil than they could. The crisis meant that supply had to be reduced in order to cope with the enormous drop in demand. Now that the demand for oil is picking up and the vaccines offer the prospect of a world without corona, the countries see their chance to sell more oil again.
The phasing out of the production limitation of the world’s most important raw material will be gradual. The agreements between the countries now provide for a total production limitation of more than 8 million barrels per day. This will be partly phased out in May, June, and July. At that point, the oil states will jointly produce more than two million barrels per day more than they do now. Six million barrels per day will then remain of the restriction.
‘The OPEC+ is trying in this way to absorb shocks to supply and demand that is too great,‘ says Robert Pritchard, Head of Commodities Trading at Chelton Wealth. ‘It removes a lot of uncertainty. That uncertainty in the oil market is mainly in the demand for oil. The rollout of vaccines and the course of the pandemic is unpredictable, and so is the demand for oil.
Moreover, the price of crude oil has risen sharply since the worst of the crisis. A barrel of Brent oil cost less than $20 in spring 2020, while the price of US oil (WTI) was even negative for a short while.
This month, the price of a barrel of Brent briefly hit $70, more than $50 more than at the height of the crisis. A litre of petrol now costs an average of CHF 1.52 (US$1.6180) at the Swiss pump, according to data from consumer collective United Consumers.
The oil countries do not necessarily benefit from too high oil prices. They could damage demand in the long term and could also play into the hands of the competition. The United States does not take part in the oil negotiations, but it does have a large oil industry. With higher prices, it will be attractive for many shale oil producers to increase production.
The United States
The United States may not be officially involved, but behind the scenes, the country does play a role in the oil states’ deliberations. The now-former President Donald Trump was in the habit of commenting on Twitter about the desired production level of the oil states and also regularly called the rulers in Saudi Arabia. Under President Joe Biden, this appeared to be changing, but on Thursday it became clear that the US Secretary of Energy had called her Saudi counterpart prior to the meeting to discuss the oil market.
The market reaction to the decision of the oil states was initially mixed. Traders in futures contracts on crude oil always follow these very closely, because the consensus among the 23 oil countries is not self-evident. Disagreements between the countries regularly lead to unexpected results and violent shocks in the price. On Thursday evening, the market seemed to have found a direction and the oil price went up. Around eight o’clock, a barrel of Brent cost $64.70. This was more than 3% higher than on Wednesday. A barrel of US oil was $61.43, almost 4% higher than Wednesday.