On 10 December 2016 the Organisation of the Petroleum Exporting Countries (OPEC) made a historic announcement from its headquarters in Vienna. At its press conference, it disclosed that it had just reached an agreement with eleven other oil-producing states, chief among them Russia, that daily oil production was to be cut to around 1.8 million barrels from January 2017. A little less than five years have passed since what became known as OPEC+ was born. Over this period the cartel has had a dominant influence on both the oil market and energy prices. When the coronavirus pandemic triggered a collapse in commodity prices along with the global economy, the group countered with further cuts in production. By doing so, they played a key role in stopping the enormous accumulation of stocks in the first half of 2020. As coronavirus restrictions were gradually relaxed, oil consumption picked up again. This has led to the market being consistently undersupplied over the last five quarters (see graph).
Prices rose strongly with the increasing scarcity of the most important energy source. Latterly the pace of the rally has increased still further, with a barrel of Brent climbing 12% within the space of a month (see chart). The North Sea oil now costs more than it has done at any time in the last three or so years. Once again, OPEC+ is playing the dominant role in these rises. The 21st meeting of the cooperation partners was staged on 4 October. Held at ministerial level, the video meeting was over in less than 30 minutes. OPEC+ then confirmed its plan to increase production by around 400,000 barrels per day in November. "Given the sharp rise in the price level and the constricted market situation, more than a few market players had been hoping for a greater expansion in supply," commented Carsten Fritsch, commodities analyst at Commerzbank, on the decision. In his view, the market will exhibit a considerable supply deficit in the fourth quarter as well.
The U.S. Energy Information Administration (EIA) shares this assessment. In its latest forecast, it anticipates that global oil production will lag behind demand by an average of over 800,000 barrels per day in the period from October to December. OPEC even predicts a deficit roughly twice as great. Carsten Fritsch attributes the scarcity in part to higher gas prices, adding that these are resulting in electricity generation in many regions being converted from gas to oil. "Saudi Arabia's state oil company quantifies this additional demand effect at 500,000 barrels per day," the analyst writes in a comment. On top of this, actual increases in production could remain behind the announced level: according to Fritsch, OPEC members Angola and Nigeria, for instance, will not manage to deliver the agreed additional quantities. Not least for that reason, OPEC+ as a whole did not achieve the stated increase in production in August and September, nor has the group yet indicated whether such shortfalls will in future be filled by countries with sufficient available capacities.
At any rate, there is huge pressure on the cartel to increase production even more than planned. "So far, though, it doesn't look like OPEC+ is willing to do so," says the Commerzbank expert. Moreover, the USA would only raise its output slightly. According to the EIA, US oil production in the fourth quarter is set to increase by only 2.2% on the July to September period. All things considered, the Commerzbank research expects prices to continue rising. In the view of the Frankfurt bank, the US government could put the brakes on the black gold by releasing strategic oil reserves. The weather in the northern hemisphere should also have a bearing on prices in the weeks and months ahead especially. A harsh winter would force energy demand up even higher. Although most of the OPEC+ representatives come from warmer climates, the meteorological situation in the group could certainly play a role. Whatever the case, the 22nd meeting is scheduled for 4 November, when the combined suppliers could once again exert a considerable influence on energy prices.
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