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Daily News Analysis

OPEC+ DEAL ON OIL CUTS

6th June, 2023 International Relations

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Context

  • OPEC+ (Organization of the Petroleum Exporting Countries and allies led by Russia) meeting to discuss output policy and potential production cuts.

Details

OPEC+ Deal and Output Policy:

  • OPEC+ (Organization of the Petroleum Exporting Countries and allies led by Russia) reached a deal on output policy after lengthy talks.
  • The group is likely to maintain the existing output agreement for 2023 and consider additional cuts in 2024, depending on agreed production baselines.

Saudi Arabia's Voluntary Cuts:

  • Saudi Arabia, a key member of OPEC+, will pledge new voluntary production cuts.
  • The exact timing and extent of Saudi's cuts, as well as the overall cuts by OPEC+, are yet to be determined.

Impact of OPEC+ Decisions:

  • OPEC+ collectively produces around 40% of the world's crude oil, making their policy decisions influential in global oil prices.
  • Additional production cuts, if approved, could amount to 1 million barrels per day on top of existing cuts, totaling 4.66 million bpd.

Oil Price Volatility:

  • The April announcement of voluntary cuts led to a temporary price increase, but concerns about global economic growth and demand caused prices to decline.
  • The international benchmark Brent settled at $76, reflecting the impact of market pressures.

Saudi Arabia's Warning:

  • Saudi Arabia's Energy Minister warned investors who were shorting oil prices to "watch out," suggesting the possibility of additional supply cuts.
  • This statement was interpreted as a signal of potential further actions by OPEC+ to support oil prices.

Western Accusations and OPEC's Perspective:

  • Western nations have accused OPEC of manipulating oil prices and undermining the global economy.
  • OPEC insiders argue that Western money-printing has driven inflation, necessitating actions to protect the value of oil exports.

African Nations and Output Targets:

  • Influential OPEC members, led by Saudi Arabia, aimed to persuade under-producing African nations like Nigeria and Angola to set realistic output targets.
  • Nigeria and Angola have struggled to meet their targets but oppose lower baselines as it could require actual production cuts.

UAE's Production Capacity and Baseline Demands:

  • The United Arab Emirates (UAE) seeks a higher baseline in line with its growing production capacity.
  • However, this could result in a decrease in its share of overall production cuts within OPEC+.

Media Access Restrictions:

  • OPEC denied media access to its headquarters for Reuters and other news media outlets.

About OPEC

  • OPEC (Organization of the Petroleum Exporting Countries) is an international organization that collaborates on oil production and pricing policies.
  • OPEC was founded in 1960 in Baghdad,
  • The organization's headquarters is located in Vienna, Austria.

Members:

OPEC consists of 13 member countries

  • Algeria
  • Angola
  • Equatorial Guinea
  • Gabon
  • Iran
  • Iraq
  • Kuwait
  • Libya
  • Nigeria
  • Republic of the Congo
  • Saudi Arabia
  • United Arab Emirates
  • Venezuela

Objective:

  • OPEC's primary objective is to coordinate and unify petroleum policies among its member countries to secure fair and stable oil prices, ensuring a steady income for oil-producing nations and a reliable supply for consumers.

Decision-Making:

  • OPEC operates on a principle of consensus among its member countries.
  • Major decisions, such as production quotas and pricing policies, are reached through negotiations and consensus among the member nations.

Production Quotas:

  • OPEC establishes production quotas for its member countries to control global oil supply and stabilize prices.
  • These quotas are determined based on each member's production capacity and market share.

Influence and Impact:

  • OPEC has historically been a significant player in the global oil market, with its member countries accounting for a significant share of global oil production and reserves.

About OPEC+

  • OPEC+ refers to a coalition between the Organization of the Petroleum Exporting Countries (OPEC) and a group of non-OPEC oil-producing countries, most notably Russia.
  • OPEC+ was formed in 2016 as a response to the global oversupply of oil and the resulting low oil prices.
  • OPEC recognized the need to collaborate with non-OPEC countries to effectively manage oil production levels and stabilize the market.

Members:

OPEC+ is an expanded version of OPEC and includes additional non-OPEC countries, most notably Russia.

Non-OPEC Members:

  • Azerbaijan
  • Bahrain
  • Brunei
  • Kazakhstan
  • Malaysia
  • Mexico
  • Oman
  • Russia
  • South Sudan
  • Sudan

Objectives:

  • The primary objective of OPEC+ is to collectively manage oil production levels in order to balance supply and demand and stabilize oil prices.
  • By coordinating production cuts or increases, OPEC+ aims to prevent significant price fluctuations and maintain a more stable market environment.

Production Agreements:

  • OPEC+ agreements involve setting production quotas for each participating country.
  • These quotas specify the amount of oil that each country is allowed to produce.
  • The goal is to collectively reduce or increase oil production to align with market conditions and maintain price stability.

Meetings and Decision-Making:

  • OPEC+ holds regular meetings, typically every six months or as needed, to discuss and decide on production levels and policies.
  • During these meetings, representatives from OPEC and non-OPEC countries negotiate and reach consensus on production adjustments.
  • The decisions are based on various factors, including market analysis, supply-demand dynamics, and geopolitical considerations.

Impact on Oil Prices:

  • OPEC+ decisions have a significant impact on global oil prices due to the coalition's collective production capacity.
  • When OPEC+ countries agree to cut production, it reduces the global supply of oil and often leads to higher prices.
  • Conversely, when production cuts are eased or increased, it can put downward pressure on oil prices.

Market Challenges:

  • OPEC+ faces challenges in maintaining cohesion among its diverse membership, as countries may have different economic and geopolitical interests.
  • The coalition must strike a balance between the needs of oil-producing countries and the stability of the global oil market.

PRACTICE QUESTION

Q)Which of the following is NOT a goal of OPEC+?

(A) To stabilize the oil market

(B) To ensure that oil prices are fair to both producers and consumers

(C) To promote the long-term interests of the oil industry

(D) To increase oil production

Answer: D

 

https://www.deccanherald.com/business/business-news/saudi-plans-new-oil-cuts-as-part-of-opec-deal-1224831.html