OPEC and Oil Prices

OPEC and Oil Prices

The Organization of the Petroleum Exporting Countries (OPEC) is a permanent intergovernmental organization of 13 nations. OPEC’s headquarter is in Austria, and it was founded at the Baghdad Conference by Iraq, Kuwait, Saudi Arabia, and Venezuela. Currently, it consists of the above-mentioned countries in addition to Libya, UAE, Algeria, Nigeria, Angola, Gabon, Equatorial Guinea, and Congo.

OPEC’s objective is to co-ordinate and unify petroleum policies among member countries. This in order to secure fair and stable prices for petroleum procedures and an efficient, economic, and regular supply to consuming nations, in addition to a fair return on capital to those investing in the industry.

The main risk to the oil market early in the decade was the global economy, as global macroeconomic uncertainty, in addition to the international financial system risk affecting the supply and demand. Though, the oil market remained relatively balanced between 2011 and 2014 before the combination of speculation and oversupply caused it to fall in 2014. The trade pattern continued to shift, with the growth in Asia and overall shrink in other countries. OPEC continued seeking stability in the market and looked further to enhance its dialogue and cooperation with consumers and other non-OPEC producers. 

OPEC and its allies (OPEC+) made a deal to increase production by 500,000 barrels per day (BPD) starting from January on December 3, 2020, which is much lower than the original agreement in April to raise the output by 2 million barrels. Moreover, the output increase will be split equally among all members. This decision brings the production cuts to 7.2 million BPD starting in 2021. Both oil benchmarks rose on December 3, with Brent 2.01% at $49.69 and West Texas Intermediate gaining 2.02% to trade at $46.56. 

(image credits: investing.com)

(image credits: investing.com)

Expectations for 2021

With the rising hopes of finalizing a COVID-19 vaccine and the U.K. becoming the first country to approve it for emergency use, and because of the progress with mass vaccination will probably be a slow process, the demand for oil will remain weak until at least the second half of 2021. The U.S. Energy Information Administration expects that the international benchmark will be at $46.59. On the other hand, Fitch Rating expects Brent prices to drop to $45 per barrel next year. 

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