The next OPEC meeting will be held on August 3, with a view to coordinating and unifying petroleum policies among members. This is a much-awaited meeting, as Europe and the US move away from Russian oil, and in a context of surging oil prices. Biden and its European peers hope that OPEC will increase production, which would secure their supply and ease prices.
But OPEC has to secure fair and stable prices for petroleum producers, as well as a return on capital to those investing in the industry. On February 24, Russia - a highly influential player in the energy world - invaded Ukraine, which caused the largest refugee crisis since World War II. Europe and the US imposed sanctions as retaliation, and decided to ban the use of Russian oil in their countries. This, combined with soaring global inflation and a booming economy following the Covid pandemic, led crude oil prices to soar to their highest level since 2008 – with $139 a barrel of Brent in March. Countries in Europe that are highly dependent on Russian oil – like Germany – had to turn to other producing countries, but there aren't that many alternatives. China and India are already buying Russian oil at a 30% discount to the market price, which raises tensions with Western powers.
Crude Oil Brent – MarketScreener Dynamic Chart
The oil market is the most liquid - the exchanges are the most important - and crude oil is one the world's most in-demand commodities. The objective of this meeting is therefore to ensure the balance and sustainability between market phenomena such as consumer demand for crude oil and producer supply, using the tool of quotas on oil production.
In order to prepare the next meeting, Joe Biden recently visited Saudi Arabia, but failed to secure public pledges on raising oil output from Gulf OPEC producers. Nevertheless, the US expect oil production to rise after Saudi Arabia said there is no shortage of oil in the market, but a lack of refining capacity.
Reuters: Demand/Supply Balance
The price of oil is certainly a major problem for the US, combined with inflation, but the profits generated in other markets allow them to limit the damage. The four major assets of the United States today are: US natural gas exports to Europe, the strengthened dollar, substantial profits for US military-industrial complex.
The United States is facing headwinds currently, with the war in Ukraine, rising inflation and the announcement of a technical recession. However, some European Union countries have turned to the United States for oil, liquefied natural gas and coal deliveries. This allows the country to develop its infrastructure and international deliveries (US natural gas exports to Europe).
More expensive imports in Europe and a safe haven status allow the dollar to strengthen against the euro. As for the euro, fearing a global conflict, a sharp decrease in gas imports, a food shortage and a recession, its price has fallen in favor of the dollar.
Global oil supply may struggle to keep pace with demand next year, as tighter sanctions force Russia to shut in more wells and a number of producers bump up against capacity constraints. This decline should partly be offset by the rise of Libya, whose supply should increase from 800,000 barrels per day to 1.2 million barrels per day. But the country has limited reserves and might not be able to keep up this pace for long. Demand should also increase, as demand in China recovers from Covid lockdowns, and the OPEC+ spare production capacity cushion erodes.
The oil cartel has an important impact on markets, through the need for liquidity. Too much volatility is obviously detrimental to producers and consumers. OPEC+'s interest is to constantly monitor market activity and seek a balance between supply and demand. Higher energy prices ripple through the economy, raising the cost of manufacturing and shipping all kinds of goods, and ultimately driving up prices for consumers.
Statista: Average annual OPEC crude oil price
It may seem somewhat strange that an organization - whose main goal is to maximize the profits of its members - would increase production, thereby increasing supply and potentially lowering prices. But, more importantly, it is important that the price of oil is high, but not excessive.
Despite Western sanctions imposed on Russia's exports, demand for Russian oil and gas has not declined. As previously mentioned, China, India and Germany remain among the top consumers of Russian gas. Saudi Arabia is one of the world's largest oil producers and has an additional production capacity of one million barrels per day, but does not want to use it all. The question is rather simple, should they let the price rise while maintaining a crisis level of spare capacity or should they add oil to the market and thus move to almost zero spare capacity? Having no reserves is dangerous in times of crisis, and putting too many barrels on the market can drastically lower prices. Therefore, it seems unlikely that we'll see major changes at tomorrow's meeting.
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