OPEC and Oil Price
Saudi Arabia and the United Arab Emirates announced they would raise crude oil output by the equivalent of 3.6% of global supplies, adding 3.6 million barrels per day (bpd) to a market that is already massively oversupplied. This extraordinary flooding of the market will take place at a time when thecoronavirus outbreak hasseverely impacted businesses and travel, and global demand is predicted to shrink for the first time in nearly 10 years.
● OPEC (Organization of Petroleum Exporting Countries) is a permanent intergovernmental organization of 13 oil-exporting developing nations that coordinates and unifies the petroleum policies of its Member Countries. It is Headquartered at Vienna, Austria. OPEC+ is an informal alliance of OPEC and Russia.
● OPEC's objective is to coordinate and unify petroleum policies among Member Countries, in order to secure fair and stable prices for petroleum producers; an efficient, economic and regular supply of petroleum to consuming nations; and a fair return on capital to those investing in the industry.
Saudi Arabia and the UAE have taken a united stand in their ongoing battle with Moscow, which rejected a demand by Riyadh that the OPEC+ should cut production sharply to arrestcrashing prices. In retaliation, the Gulf allies have decided to scrap all limits on production.
The crippling of industrial production in China and other Asian countries such as South Korea has resulted in a sharp reduction in their import of crude oil. Hence, at the meeting of OPEC, Riyadh proposed that OPEC+ should pump about 1 million bpd less, with Russia cutting 500,000 bpd, so that revenue streams do not narrow further for oil export-dependent economies.
But Moscow argued that production should not be cut until the full impact of theCOVID-19 outbreak is assessed in greater detail, and that any attempt to shore up prices would only benefit the costlier US shale industry, which has raised production to levels higher than both Saudi Arabia’s and Russia’s.
How are oil prices determined?
Oil is acommodity, and as such, it tends to see larger fluctuations in price than more stable investments such as stocks and bonds. There are several influences on oil prices, a few of which are outlined below-
Oil prices are influenced by a variety of factors but are particularly responsive to decisions about output made by OPEC.
Like any product, the laws of supply and demand influence prices; a combination of stable demand and oversupply has put pressure on oil prices over the last five years.
Natural disasters that could potentially disrupt production, and political unrest in an oil-producing juggernaut like the Middle East all impact pricing.
Production costs influence prices, along with storage capacity; although less impactful, the direction of interest rates can also influence the price of commodities.
Effect of falling oil prices
A fall in oil prices should cause a reduction in transport and fuel costs for firms which will also benefit consumers. The lower oil prices will effectively increase their disposable income and enable them to spend more on other goods. This should lead to inflation and can lead to higher rates of economic growth.
However, sometimes oil prices crash because there are fears of an economic recession. In this case, falling oil prices are not sufficient to increase economic growth because other factors keep growth low. Also, if oil prices fall sufficiently, it can cause some oil firms to go out of business and this causes a rise in bad debts.
Also, falling oil prices will have differing effects depending on the country. Oil importing countries (e.g. Germany, Japan, India) will generally benefit from oil lower prices, but developing economies who rely on oil exports (e.g. Russia, Venezuela) could see a significant fall in export revenue.
In current scenario, the fall is due to expectations of a sharp drop in travel and economic recession from the coronavirus. Therefore, there is little expectation that the lower oil prices will have any positive economic effect.
Falling oil prices could delay investment into alternative ‘greener’ forms of energy, such as electric cars, and this could have negative consequences.
India is the world’s third-largest oil importer and the fourth-largest buyer of liquefied natural gas (LNG). Every dollar drop in the price of oil decreases the import bill and trade deficit.
The Saudi-Russian fight signals an end, at least temporarily, to the truce between these two large oil producers that had brought Moscow a seat at the OPEC high table, and held off a potential price war for more than three years now.
Russia had benefited from the deal not only in terms of oil revenues and expanding business networks, but also in foreign policy — improving relations with Saudi Arabia, has given Russia greater influence over developments in countries like Syria, Iraq, and Libya.
There are dozens of different oil benchmarks, with each one representing crude oil from a particular part of the globe. However, the price of most of them are pegged to one of the following three primary benchmarks:
West Texas Intermediate (WTI) refers to oil extracted from wells in the U.S. The product itself is very light and very sweet, making it ideal for gasoline refining, in particular. WTI continues to be the main benchmark for oil consumed in the United States.
Brent Crude: Roughly two-thirds of all crude contracts around the world reference Brent Crude, making it the most widely used marker of all. “Brent” actually refers to oil from four different fields in the North Sea.
Dubai/Oman: This Middle Eastern crude is a useful reference for oil of a slightly lower grade than WTI or Brent. It’s somewhat heavier and has higher sulfur content, putting it in the “sour” category.
PEPPER IT WITH
Shale Gas, Gulf Cooperation Council, USA’s sanction on Iran and Effect on Indian Energy Security