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OPEC Speaks- The Fallout for Inflation and Energy Prices
OPEC, the international oil cartel, meets twice yearly in Vienna, Austria to debate and decide on petroleum production policy for the coming months.
OPEC, the international oil cartel, meets twice yearly in a formal gathering in Vienna, Austria. The members convene to debate and decide on petroleum production policy for the coming months to balance supply and demand at a price that delivers the most attractive return for oil-producing countries and traditional energy investors.
Saudi Arabia is the cartel’s leading producer and most powerful member. Meanwhile, over the past years, Russia emerged as an influential non-member, cooperating with the cartel on production policy. Therefore, OPEC’s policy decisions have become a function of decisions made in Riyadh and Moscow. Going into the latest meeting, oil prices had declined from the 2022 highs of over $130 per barrel for the two benchmark futures markets, the ICE Brent and the NYMEX WTI contracts. With WTI near $70 and Brent $75, OPEC plus Russia faced a bearish trend as economic weakness in China and U.S. SPR sales weighed on the energy commodity’s price. In a sign that the June 4 OPEC meeting would be highly contentious, the cartel banned the press, a departure from the past.
The OPEC+ Decision
- Saudi Arabia lowered July crude oil output to nine million barrels per day.
- OPEC and Russia agreed to limit supplies into 2024 to boost petroleum prices.
- Output targets for Russia, Nigeria, and Angola were aligned with output levels.
- The cartel will allow the UAE to increase production in 2024.
Russia and Saudi Arabia- A fine line between friend and foe
- Russia began cooperating with the international oil cartel in 2016, coordinating production quotas.
- Saudi Arabia is the leading OPEC producer and leads the cartel’s decision-making negotiations.
- Over the past years, production decisions have resulted from discussions between Riyadh and Moscow.
- The war effort has caused Russia to increase its crude oil sales, causing some friction with the Saudis.
The reasons the leaders need higher prices
- Balancing Saudi Arabia’s domestic budget requires an $80 per barrel Brent crude oil price.
- Russia’s prolonged battle in Ukraine requires more funding.
- The cartel suffered for years from low prices as U.S. shale production weighed on global prices and took pricing power from OPEC.
- S. energy policy is not guaranteed to remain committed to alternative and renewable fuel sources following the 2024 Presidential election.
- A reversal of U.S. energy policy could cause output to rise and prices to fall.
The factors supporting crude oil over the coming weeks and months
- Chinese demand has been weak. An economic recovery in China could increase the demand and prices.
- Over the coming two years, U.S. energy policy will encourage clean energy and inhibit fossil fuel production and consumption.
- The U.S. target for replacing the Strategic Petroleum Reserve at the lowest level since 1983 is $67 to $72 per barrel, putting a potential floor below the current price level.
- The U.S. Department of Energy has tendered for the first three-million-barrel purchase in June, which could begin a period of SPR buying instead of selling.
The impact on markets across all asset classes
- Rising crude oil prices increase inflationary pressures.
- Rising traditional energy prices lift other raw material production costs, increasing the prices of industrial commodities and finished goods.
- Higher crude oil and oil product prices increase logistical expenses, and consumers wind up paying.
- The critical technical support levels for the WTI and Brent benchmarks are $62.43 and $65.77 per barrel, the December 2021 lows. The prices were above these levels on June 9, with the U.S. DoE a lurking buyer below the market and OPEC trimming output to support prices.
Thanks for reading, and stay tuned for the next edition of the Tradier Rundown!