As demand for oil rises globally, the Organization of Petroleum Exporting Countries (OPEC) is aiming to restore production to pre-pandemic levels.
OPEC Agrees to New Deal
On July 18, OPEC agreed to a new production deal that’d see oil output return to pre-pandemic levels by the end of 2022. OPEC allies, such as Russia and the U.S., have also agreed to boost production after seeing oil prices climb. This deal would see oil producers generate an extra 400,000 barrels per day.
Prior to this agreement, oil prices had been rising throughout 2021. By July 1, Brent Crude — the international benchmark for oil — was up 43% year-over-year to $75.84. U.S. oil prices rose above $75 for the first time since 2018. This rise in price has become part of an ongoing discussion about inflation in a global economy still navigating a pandemic.
After a year of near-zero interest rates and low consumer prices, new inflation data is shaking up markets. Now, there are concerns that inflation could continue to rise unchecked.
Though nations like the U.S. have been championing the shift toward green energy, there’s concern over how consumers may be affected by rising oil prices. The Biden administration played a significant part in reaching this new production deal, especially as Saudi Arabia and the United Arab Emirates (UAE) couldn’t agree on boosting output.
A Sudden Shift in Policy
In April 2020, as COVID-19 brought oil demands to new lows, OPEC and allied nations had to find a solution. Oil prices had fallen roughly 40% within a month, and world leaders were demanding action. Finally, despite a standoff and tariff threats, 23 countries finally agreed to historic production cuts — withholding 9.7 million barrels of oil per day, or over 13% of the world’s oil production.
As vaccines began to roll out globally, demand for oil began to rise. With global economies beginning to reopen, OPEC estimated that an extra two million barrels of oil per day would be needed for the remainder of 2021. IHS Markit, a U.K. based data and research firm, expected even greater demand, with industrialized nations requiring an extra seven million barrels per day. Oil consumption could rise to pre-pandemic levels by the middle of 2022. By June 2021, major oil producing countries such as Russia and the U.A.E. were calling for a rise in output.
However, Saudi Arabia didn’t share the same sentiment, pushing back a vote on the issue.
Though OPEC data showed a rise in oil demand, Saudi Arabian officials stated that this was a temporary trend that’d only be seen in some industrialized nations. Concern about the economic state of India and China have been issues for Saudi Arabia, as an economic slowdown in these countries would hurt global oil demand. The spread of the Delta variant in Europe and the U.S. was also a concern, possibly slowing the economic recovery in areas where a call for oil had been returning.
Another problem preventing OPEC from raising oil production had little to do with the pandemic but rather with logistics. The U.A.E. wanted a higher output quota within OPEC — seeking to take advantage of the rising oil demand to grow their market share. This led to the standoff between the U.A.E. and Saudi Arabia, typically allies, before the Biden administration intervened. Saudi Arabia eventually allowed an OPEC vote to occur and raise oil production — a sudden tone shift when Saudi Arabia seemed unwilling to budge just a week earlier.
Outcome of the Production Boost
The new OPEC deal includes both an immediate production boost, and a May 2022 increase in the maximum amount of oil OPEC nations may output — something the U.A.E. was arguing for.
Already, results are being seen. On the day following news of a boost in oil output, WTI Crude Futures, the U.S. based benchmark, dropped 8%, bringing U.S oil prices back below $70. Brent Crude fell 6.75% to $68.62 per barrel. This seems to have the impact that parties such as the U.S. and Russia wanted: lowering global oil prices in order to ease the price of products like gasoline on domestic consumers. In a statement to clients, Goldman Sachs stated that the OPEC deal supports its price view on global oil markets.
Some analysts suspect that this boost in oil output may not have lasting effects. Both Citi and Credit Suisse have raised their estimates on what the WTI and Brent will average for the year. Both firms suggest that global demand for output may continue to outpace production and that market pressures will remain — driving prices back up. There’s also a great deal of concern about the ongoing pandemic — especially the spread of the Delta variant, which may cause fluctuations in oil prices.
Stocks in the energy sector saw a decline on July 19, following news of the OPEC deal. The sector dropped 4.5% — making it the worst performing S&P 500 sector. Still, the deal is being touted as good for consumers, at least in the short term. However, the hit to energy sector stocks, the estimates by analysts that see oil benchmarks climbing and the continued uncertainty that comes with the pandemic shows that OPEC and its allies may have more work ahead of them. OPEC said that they’ll reevaluate markets come December.
Jabril Al-Hamdy is a sophomore finance major. Contact Jabril at alhamdjk@dukes.jmu.edu.