The OPEC and its allies, collectively known as OPEC+, play a significant role in shaping global oil prices.
Through their production agreements and coordinated actions, OPEC+ has the power to influence the supply and demand dynamics in the global oil market.
In this article, we delve into the intricacies of OPEC+ and explore their impact on oil prices.
Understanding OPEC+'s role provides valuable insights into the factors driving oil price fluctuations and their implications for energy markets and the global economy. By analyzing these factors, one can gain a deeper understanding of the dynamics influencing oil prices and their broader impact.
What is OPEC?
OPEC, or the Organization of the Petroleum Exporting Countries, is an intergovernmental organization consisting of 13 member countries.
Established in 1960, OPEC aims to coordinate and unify the petroleum policies of its member countries. Its primary focus is on maintaining stable oil prices and ensuring a steady income for member nations. This includes both crude oil and fuel oil.
The member countries include major oil-producing nations such as Saudi Arabia, Iraq, Iran, Kuwait, and the United Arab Emirates, among others. OPEC plays a crucial role in the world oil market by collectively managing oil production levels and influencing supply and demand dynamics to stabilize oil prices.
How Did OPEC+ Form?
OPEC evolved into OPEC+ in 2016 as a response to the significant challenges faced by the global oil market. The change occurred when OPEC, traditionally consisting of 13 member countries, decided to collaborate with non-OPEC oil-producing nations to address the oversupply and low oil prices prevailing at the time. The initial catalyst for this cooperation was a joint effort between OPEC, led by Saudi Arabia, and Russia, one of the world's largest non-OPEC oil producers.
In December 2016, OPEC reached an agreement with several non-OPEC countries, including Russia, to collectively reduce oil production. This marked the formation of OPEC+ and the beginning of a coordinated effort to manage global oil supply and stabilize prices. This formation also means that OPEC+ now controls about 40% of the world’s crude oil and fuel oil production.
What are their Goals?
The primary goal of OPEC+ is to stabilize the global oil market and maintain favorable oil prices. They do this by coordinating oil production levels among its member countries.
By collectively managing oil supply, OPEC+ aims to ensure a balance between global oil production and demand. This involves implementing production cuts or increases as necessary to prevent oversupply or shortages, thereby supporting price stability and market equilibrium.
OPEC+ seeks to create a sustainable and predictable environment for both producers and consumers in the global oil industry. Additionally, the alliance aims to foster collaboration and cooperation among OPEC and non-OPEC countries, promoting dialogue and joint decision-making to address common challenges and opportunities in the oil market.
Since the formation, OPEC+ has continued to operate as a coalition, periodically meeting to assess market conditions and make collective decisions on oil production levels. The alliance has gone through several rounds of production cuts or increases, depending on market conditions and the objectives of maintaining price stability and market equilibrium.
The collaboration between OPEC and non-OPEC nations through OPEC+ represents an expanded and more inclusive approach to managing global oil markets.
OPEC+ New Oil Output Agreement in June 2023
The OPEC+ nations came together on 4 June 2023, and agreed on new oil output deal.
To address the declining oil prices, Saudi Arabia, as the largest producer within the group, has decided to implement a significant reduction in its oil output for July.
This reduction comes in addition to the broader agreement made by OPEC+ to limit the supply of oil until 2024. The aim is to stabilize and support oil prices, which have been experiencing a decline.
According to Reuters, the OPEC+ group not only extended the existing cuts of 3.66 million barrels per day (bpd), but also decided to reduce the overall production targets from January 2024 by an additional 1.4 million bpd. This adjustment brings the combined output target to 40.46 million bpd.
Crude Oil and Fuel Oil Futures Market News
Traders looking to trade INE Crude Oil Futures, Chinese Crude Oil Futures or Brent Crude Futures should look to understand the latest news. According to Orient Futures’ Weekly Updates Report on the Fundamental Data of Energy Products dated 16072023, here is the market news for Crude Oil and fuel oil futures.
Crude Oil Supply & Demand
The crude oil production market currently demonstrates relatively stable supply and demand fundamentals. However, unexpected disruptions on the supply side can provide short-term support for oil prices.
Recently, protests in Libya forced the shutdown of oil fields, including the significant Sharara field, which has a capacity of 300,000 barrels per day (bpd). Libya's oil exports, under normal circumstances, hover around 1.1 million bpd, and if the protests persist, exports may be impacted, potentially leading to supply cuts.
In addition, Russia has announced its plan to reduce oil exports by 500,000 bpd in August, in response to the production cuts enforced by the OPEC+. While Russia hasn't disclosed the baseline for its cut, shipping data indicates a decline in Russia's seaborne crude oil exports in June by 460,000 bpd compared to the previous month. This suggests that the export reduction may have already been implemented, despite the lack of official disclosure regarding the baseline for the cut.
Despite these supply-side uncertainties, the demand side remains resilient. Adjustments in supply by various countries, including OPEC+ members, help mitigate the risk of significant imbalances between supply and demand, thereby supporting oil prices. Consequently, short-term oil prices are expected to have some upward potential.
Fuel Oil Demand & Supply
In the fuel oil market, crack spreads of High-Sulfur Fuel Oil (HSFO) and Very Low-Sulfur Fuel Oil (VLSFO) experienced a decline in the past week. Specifically, the high-5 spread dropped below 100 USD/metric ton, indicating a downward trend in profitability for these fuel oil products. While the physical markets of HSFO remained strong, those of VLSFO turned softer. The latest bunker sales data from the Maritime and Port Authority (MPA) showed sales of 3.93 million metric tons in June, indicating a 4.8% year-on-year increase but a 13% month-on-month decrease. Sales in May were significantly higher compared to previous years, making June sales appear more normal in comparison. Additional data is required to substantiate any potential deterioration in the bunker markets.
Crude Oil Price
Crude Oil prices continued to rebound moderately. Brent Crude oil price fell back on Friday after hitting the $80/barrel mark. The continued decline of the US dollar index supported commodity prices. The market has fully priced in the Fed’s interest rate hike expectations, and macro suppression has temporarily eased.
Fuel Oil Price
The movement in crack spreads has implications for fuel oil prices. The decline in crack spreads of HSFO and VLSFO, with the high-5 spread below 100 USD/metric ton, suggests a potential decrease in refining profitability. The softer market for VLSFO may impact supply and demand dynamics. However, it is important to note that the current data alone does not provide conclusive evidence of a sustained downturn in bunker markets. Further data analysis is necessary to confirm any potential deterioration and its subsequent impact on fuel oil prices.
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