OPEC Stays the Course despite Rising Oil Prices

News sources quoted from: by the Center for Strategic and International Studies (CSIS),October , 2021


Media www.rajawalisiber.com  – The Organization of the Petroleum Exporting Countries (OPEC) and its allies in OPEC+ are proceeding with their production plans despite the run-up in oil prices. On October 4 the group decided to continue adding 400,000 barrels per day (b/d) to the market each month, ignoring pressure from oil-importing states for greater volumes. For now, OPEC+ is shrugging off concerns over the economic impact of higher oil prices, perhaps mindful of a softer outlook for next year.

Q1: What happened at the OPEC meeting?

A1: OPEC+ is sticking with its plan to gradually add more volumes to the market as it unwinds the largest-ever production cut it instituted in April 2020. In July OPEC+ accommodated demands from some members for higher production quotas and targeted output increases of 400,000 b/d each month from August until April 2022, with slightly higher volumes in subsequent months. The group is on track to phase out its production cuts by next September but will leave some room for flexibility in the second half of 2022. Speculation that OPEC+ would open the taps and add more than 400,000 b/d in November proved to be unfounded. The group will meet again on November 4.

Q2: Why didn’t OPEC decide to produce more?

A2: Policymakers in Europe and the United States are concerned about rising energy prices, and in the run-up to Monday’s meeting there were calls for OPEC to raise output. But OPEC attributes the dramatic rise in energy prices to structural factors that it cannot resolve on its own. OPEC officials point to underinvestment in fossil fuels over the past six years, arguing that governments have overestimated the pace of the energy transition and investors have prematurely cut off capital for the industry. The market will probably remain tight in the coming months. Saudi Aramco’s chief executive estimates that gas to fuel oil switching in the power sector could temporarily boost demand by 500,000 b/d. China has directed state energy firms to secure sufficient supplies for this winter, adding to concerns over potential scarcity. Still, oil ministers are wary of overreacting to temporary market conditions. So far, monthly increases of 400,000 b/d seem to be the sweet spot for the group, satisfying countries that are anxious to raise production as well as others more wary of downside risks. OPEC+ seems to have concluded that prices above $80 per barrel will remind countries of the need for continued investment to prevent volatility. For now, oil producers will benefit from both higher volumes and higher prices. In short, OPEC+ is quite happy with the current state of affairs.

Q3: What does this mean for the oil market outlook?

A3: Following Monday’s decision, Brent crude prices rose to their highest level in seven years, before falling back to just above $81 per barrel. Market bulls are convinced that we are in the early stages of a rally, and cost inflation and a tight labor market in the sector are fueling this speculation. Global crude inventories have dropped rapidly in the past few quarters but are likely to flatten or possibly grow in recent months as OPEC+ adds production. OPEC+ also still has a great deal of crude waiting to be brought online. Citi reckons that OPEC 10 (excluding Iran, Libya, and Venezuela) has more than 5 million b/d in spare capacity. Both of these factors suggest the physical market is not as tight as some believe. Looking beyond the immediate term, the run-up in energy prices could prove to be an inflection point for U.S. producers. So far this year, shale companies have kept an impressive level of capital discipline even with rising oil prices. Rather than increase capital expenditures and ramp up drilling, companies are still focusing on paying down debt and returning cash to shareholders in the form of higher dividends and share repurchases. For now, shale players are wary of suggesting a return to growth. But market conditions are changing, and companies that fail to raise output with prices at this level are arguably leaving money on the table. Investors may well change their tune, and investor presentations by companies this fall will show whether the mantra of capital discipline is fading. Smaller and privately held companies are very likely to expand drilling programs.

Q4: How will the United States and other consumers react?

A4: The United States, India, and China have already raised concerns over rising oil prices. U.S. national security adviser Jake Sullivan discussed oil prices with Saudi and United Arab Emirates (UAE) officials on a recent trip, and yesterday Press Secretary Jen Psaki said the White House will use every tool at its disposal to keep gasoline prices down. So far, the United States is leaning on OPEC but taking a measured approach. If prices continue this upward trend, the White House may explore other options to cool the market, but as always, presidents have very limited control over prices set by global market conditions. China, the world’s largest oil importer, is also sending important signals. Last month China held the first-ever sale from its strategic petroleum reserves, auctioning only 4.43 million barrels but signaling that it could intervene more directly in the future to cool inflationary pressures.

Ben Cahill is a senior fellow with the Energy Security and Climate Change Program at the Center for Strategic and International Studies in Washington, D.C.

Critical Questions is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

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