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OPEC is weakening. It may soon become stronger than ever


But with demand for crude soaring as the impact of the pandemic fades, that’s no longer the case.

OPEC+, which includes the Organization of the Petroleum Exporting Countries and allies like Russia, is once again flexing its muscles. Group refuse to join calls by US President Joe Biden to increase production – a move that could help ease upward pressure on gasoline prices – led to the decision by the United States and other major energy consumers to last week. exploiting strategic oil reserves.
The episode shows the market power of the group, even as an energy transition is underway. Demand for oil could soon peak if countries hit their net zero emissions targets, but OPEC producers and Russia are quick to note that won’t go away entirely. According to the climate commitment made through early October, the world is is still expected to need 75 million barrels of oil per day by 2050, according to the International Energy Agency.

“This is definitely a period where OPEC and the broader OPEC+ group are seeing a lot of influence on the oil market,” said Richard Bronze, head of geopolitics at consulting firm Energy Aspects.

When it comes to oil price dynamics, it’s hard to predict the future. Political or weather events can trigger a boom or create a big drop. The pandemic adds to the uncertainty, especially as scientists race against Evaluation of the Omicron . variant. Witnessing a price drop of more than 20% in recent days has brought US oil futures prices back to levels last seen in August.

Omicron could put OPEC and Russia in the back foot once again. And analysts believe their decline could decline further next year as US manufacturers regain their footing. But over time, their power could increase – especially as the climate crisis prompts others to cut output, either due to pressure from financial backers or due to anticipated falling demand. .

“The only manufacturer has made the necessary investment [to sustain long-term production] are Saudi Aramco and Adnoc, “Ellen Wald, author of the book” Saudi, Inc. “, referring to state-owned oil companies in Saudi Arabia and the United Arab Emirates, said.” That shifts the balance to OPEC. “

OPEC’s Moment

OPEC+ will have another chance to demonstrate its influence on Thursday, as the organization prepares to announce its latest policy decision. The group has Reportedly under review production halt expected for January in response to US decision to release reserves.

With the coronavirus variant in the equation, this seems even more likely. Brent crude oil futures are trading near $71 a barrel after plummeting 16% in November. There are even some talk that production cuts could be introduced again to avoid oversupply. market demand and increase prices.

Iraq’s Oil Minister told the country’s state news agency on Wednesday, he expected OPEC to stick to its plan to increase output by 400,000 bpd next month. In short, at an uncertain time, it’s not clear what the team will do.
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“The meeting on Thursday is currently very much in the spotlight in the oil markets,” Bronze said. “I think they’re going to have very limited information. … Likely going to pause on the planned increases in January or cut back.”

The decisions of Saudi Arabia, Russia and others have special significance because oil production in the United States has not yet recovered to pre-pandemic levels.

During the past decade, as oil prices skyrocketed, American producers rushed to ramp up output, taking on debt to pump as much crude as possible. That won’t happen this time around, as oil companies prioritize returning money to shareholders and tracking their profits.

“There wasn’t that capital available three, four or five years ago to go out and grow,” said Anish Kapadia, head of energy at Palissy Advisors.

That gives OPEC greater leverage over prices. It needs to stay high, but not so high that US manufacturers feel they have no choice but to ramp up production again.

The team only has so much control over supply and demand. If the Omicron variant severely affects economic activity, prices could fall no matter what OPEC does. The full impact of the US, China, Japan, India, South Korea and the UK putting millions of barrels of oil on the market is also still to be seen. And Some analysts believe that that although the OPEC countries have a lot of oil in the ground, they do not have enough resources to extract it quickly.

However, until production in the United States recovers, OPEC policies will remain an important driver of the market. And for now, the group seems committed to making the mistake of prudence, rather than risking member states dependent on oil revenues having to sell into scarcity.

Long term effects?

U.S. output is expected to rebound next year. But the unusual lag is raising questions about whether a deeper, more permanent change is underway.

“If you take a step back, 80 percent of oil production growth in the 2010s came from the United States,” said Nikos Tsafos, energy expert at the Center for Strategic and International Studies. “If that machine breaks down and we’re not going to sell any more oil from the United States, then our whole understanding of the oil market in the 2020s needs to change.”

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Pressure on major oil and gas companies in Europe and the US rethink their strategies amid the impact of the climate crisis. In a report published earlier this year, the IEA found that major oil and gas companies are keeping total oil and gas spending flat in 2021. The share of industry-wide spending on exploration and production is currently at 25%, compared with almost 40%. in the mid-2010s.

Meanwhile, companies like Saudi Aramco are working to increase their production capacity, with the goal of supplying oil to markets as long as there is demand.

“They still see a huge need in the developing world, and they still see a great need for petroleum products.

She continued that the lack of investment outside OPEC, coupled with the nascent financial discipline among smaller shale producers, could have lasting consequences.

Data from the IEA shows that OPEC and Russia’s share of oil production could increase from 47% in 2020 to 49% in 2030 if countries fully meet all their announced climate commitments. By 2050, OPEC and Russia are expected to account for 58% of production.

“Things can turn around, but such an investment deficit, it takes time to come back from there,” Wald said. “It puts OPEC and Saudi Arabia in an advantageous position.”

However, as always, the group’s power depends on politics. Much can depend on whether members can continue to get along and maintain a cohesive game plan. The rift between Saudi Arabia and Russia in March 2020 caused prices to crash.

“[OPEC+] “As soon as you get splits or disagreements, those things can really undermine the team’s ability to function and stick to decisions,” says Bronze. “

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