OPEC Speaks- The Fallout for Inflation and Energy Prices

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.