The OPEC+ countries have decided to stick to an existing pact for a gradual increase in oil output, sending crude prices to three-year highs and adding to inflationary pressures that consuming nations fear will derail an economic recovery from the pandemic. Here is why OPEC decided so and the expected road ahead.
OPEC and Russia-led group of oil producers decided against opening the oil taps widely as was anticipated by the experts even as the world continues to reel with an energy shortage. The group insisted on continuing to slowly and steadily increase the oil output -- an approach it had taken when the economies started recuperating after the shocks of a global pandemic.
Climbing oil prices had added fuel to analysts' expectations that the group would increase production. Instead, the Organisation of the Petroleum Exporting Countries and Russia (OPEC+), the 23-member group announced it would stick to raising production by 400,000 barrels a day in November. This is less than 0.5 percent of the world demand.
Following the announcement, the benchmark US oil rose over 2 percent to close at $77.62 a barrel. Brent crude, another oil benchmark added over 2.5 percent and closed above $81.26 -- a level it hasn't seen in three years.
As crude oil prices surged due to the rising demand as economies recover, it joined the likes of natural gas and coal, the other energy commodities, that are on an uphill climb. As the prices of these commodities surge, so does the flames of inflation.
"Investors are clearly worried about inflation due to supply chain disruptions and the rally in energy prices," Vasu Menon of OCBC Bank told Reuters.
Crude oil has risen over 13 percent in the past month and 63 percent this year. It has enjoyed a stunning rally in the past year, clocking over 80 percent as oil demand surged after economies reopened. But clearly, this rally was not enough for OPEC to consider raising the output.
The group, currently led by Saudi Arabia, with Russia as an ally, did not explain the reasoning behind its steady pace. It said it was "acting in view of the current oil market fundamentals."
This decision will allow us to continue to normalise the market situation, Russian Deputy Prime Minister Alexander Novak said after the meeting.
Assessing the decision
Analysts, on the other hand, believe OPEC is more cautious in its outlook as against experts who see demand outstripping supply in the months ahead.
While oil drilling and output in the US has surged, they are still away from pre-pandemic levels. The average crude production in the US is over 6 percent lower than the previous year.
“It’s not that OPEC+ does not recognise the coming supply shortage. The group is aware of the global inventory draws, maintenance work and rising demand, but chose to wait until later this year to adopt a bolder supply approach,” Bjornar Tonhaugen, head of oil markets at Rystad A/S told Bloomberg.
With oil prices recovering from the 2020-lows, analysts believe OPEC+ probably saw little reason to reopen the oil taps more than it had in July, an NYT Times report said. In July, the group had decided to add 400,000 barrels per day well into the next year.
OPEC is probably saying “this is not our crisis, there’s not much we can do to solve it.” Richard Gorry at industry consultant JBC Asia Pte told Bloomberg. He added extra barrels may ease the prices but they will not solve the energy crisis.
Other factors at play
Changing the course and increasing the output now probably also meant talking about quotas from producers. And countries like Saudi Arabia wanted to avoid this conversation. The United Arab Emirates—with its ambitious plans to modernise its economy—wants to raise its output limits. And Saudi Arabia wants to resist it.
The global economy is in a midst of an energy crunch. The world is running out of natural gas – a key fuel for generating power. Gas stations in Britain are running dry. China is restricting its energy usage. Electricity bills are rising, factories are shutting down, and winter is coming.
All because of a broad-based rebound in energy demand from the pandemic lows and transportation bottlenecks due to global supply chain disruptions.
Analysts are now expecting the price to jump to $90 or above before the end of the year due to supply setbacks. OPEC+ not raising the output is one setback, but hurricane Ida negating the impact of OPEC delivering inventories and absence of Iranian barrels markets was expecting would further offset the oil supply.
If the crude oil prices jump further, OPEC might come at odds with several countries, including the United States. The president of the United States, Joe Biden, has already asked the OPEC producers to increase the output (even though he might head the world's largest oil-producing nation).