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My view on what's going on in the financial markets and the global economy, and a few other things that might interest me from time to time.

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OPEC+ is at it again

This past weekend, OPEC+ jumped back into action to address falling oil prices by curtailing supply. In fact, as we now have learned, it is Saudi Arabia bearing the entire one million barrel/day decrease in daily oil production from the cartel starting in July. This follows a reduction in production “across-the-board” announced in early April by OPEC+ members, which will be effective January 2024.

OPEC+ remains a powerful cartel, and their decisions regarding supply are clearly influential in determining the price of oil, at least in the short run. However, much stronger economic forces and general sentiment can largely undermine the effects of the cartel’s manipulation of supply and hence, the price of oil. In fact, I think that in most cases, OPEC+’s supply manipulation has a sharp short-term effect but is rather quickly rendered impotent. There are also other reasons that I believe OPEC+’s supply manipulation does itself more harm than good:

  1. Deciding which countries within the cartel should cut supply and by how much sows dissent amongst cartel members, since the member-states vary rather broadly as far as their relative need for oil revenues to meet their government budgets (not to mention to ensure that, at least for autocratic states, the politicians in power remain in power);

  2. Artificially high oil prices distort the demand-supply balance leading to inefficiencies and misallocation of resources in the global economy;

  3. Higher oil prices draw in new supply and suppliers (recognising the risks of a sector that requires long-term investment), putting downward pressure on prices in the intermediate and long-term;

  4. Higher oil prices serve as a type of fiscal constraint on the global economy, ultimately reducing demand and encouraging substitution (to the extent available); and

  5. Artificially high prices driven by state-owned oil and gas companies prolong the dependency of these countries on oil, acting as an incentive that in essence discourages the development of more diverse economies; it also does little to prepare these countries for a future (one day) without fossil fuels.

To provide some context regarding the global oil market, the daily consumption of oil globally is around 100 million bbls/day, and OPEC+ accounts for around 40% of this production, or just over 40 billion bbls/day. The one million bbls/day reduction recently agreed by OPEC+ and borne completely by Saudi Arabia will go into effect in July with an indeterminate ending date. The OEPC+ press release for this most recent reduction is here, and the production schedule agreed by OPEC+ several months ago starting in January 2024 is here.

The US is both the largest oil-producing country in the world (20.2 bln bbls/day, or 20% of global supply in 2021) and the largest consumer (19.9 million bbls/day in 2021). Saudi Arabia (12% of production in 2021) and Russia (11% of production in 2021, pre-Ukraine invasion) are the next two largest producers, and China is the next largest consumer behind the US, accounting for around 15% of oil used each day in 2021. The U.S. Energy Information Administration website has a lot of information regarding the global oil industry, and you can find the link to supply and demand by country here.

The chart below shows the price of Brent crude since the beginning of 2020, just before the pandemic (source: FRED).

As you might recall, the price of oil fell sharply in April 2020 following the onset of the pandemic, but has since then recovered as the global economy reopened, getting another boost when Russia invaded Ukraine in February 2022. The cost of gas for heating rose sharply in Europe following the invasion, leading to a dramatic (and conscience) shift in demand for natural gas from Russia. Concurrently, the price of gasoline soared in the US, leading to a reaction by the Biden Administration as far as releases from the Strategic Petroleum Reserve (“SPR”) to bring down “prices at the pump”, a politically damaging association should it persist regardless of the cause. You can see how gasoline prices have changed in the US since 2018 in the chart below, including the peak of prices around the time of Russia’s invasion of Ukraine.

The US SPR has estimated capacity of 720 million barrels, but has not been over 700 million barrels since 2011. Recall that President Biden announced that the SPR would release oil twice since the pandemic:

  1. 50 million barrels announced November 23, 2021 (here), and

  2. One million barrels / day on average over six months announced March 31, 2022 (here).

The SPR was reduced from 638 million barrels in March 2022 to 372 million barrels at the end of 2022 (EIAtable here). The amount of oil in the SPR was stable at around 372million barrels the first three months of this year, but since then has been reduced further to 355 million barrels. On May 15th, the Department of Energy announced a replenishment programme (here) in which the DOE would refill the reserves over time, aiming to purchase oil at well below the $95/barrel at which the recent releases occurred. The DOE appears to be in no hurry to replenish the SPR, so will likely do it strategically based on market prices.

I have written several times in EMC about oil and the leading producer of oil in the world, Saudi Aramco, which is essentially “Saudi Inc” given its tiny public shareholder base and its listing only on the Tadawul (Saudi stock exchange). Here are the articles below, should you want to dig deeper:

“Texas Tea” (Oil), July 19, 2020

Three articles about Saudi Aramco as the time of its IPO, one here (Nov 19, 2019), one here (Dec 6, 2019) and one here (Dec 13, 2019, updated July 2020)


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