What is OPEC+?
The Organisation of Petroleum Exporting Countries (OPEC) was formed in 1960 on the initiative of Iran, Iraq, Kuwait, Saudi Arabia and Venezuela, who wanted to gain more control over oil prices. In the 1970s, OPEC consolidated its influence when it sharply cut production during the oil crisis, dramatically raising prices. This period sparked an oil shock with global economic consequences, and at the same time strengthened its market position. In 2016, OPEC joined with other major producers such as Russia to form a broader alliance known as OPEC+. It aims to regulate oil supply even more effectively and reduce market fluctuations. Joint agreements on production limits have shown the cartel's effectiveness in stabilising prices, giving the alliance global importance not only in the oil sector but also in geopolitics.
Postponing the resumption of oil production increases
OPEC+ agreed on Sunday 3 November 2024 to extend its production curbs, meaning the expected deadline is now pushed back from December 2024 to early 2025. This gradual easing was expected to bring an increase in daily production of 180 thousand barrels. The extension of the measures is a response to low oil prices caused by weak global demand, especially in China, the world's largest consumer. Demand has also been lower in the US this year, leading to a rise in global inventories. The conflict in the Middle East has also not put significant upward pressure on prices. However, following OPEC's decision on Sunday, WTI and Brent crude oil futures prices increased slightly and remained at these levels on the eve of the US presidential election. * However, their increase only erased losses from the previous week, when the oil price was at multi-week lows.
The evolution of the price of the WTI crude oil futures contract for delivery in December 2024 over the last 5 years. (Source: oilprice.com)*
Price development of the Brent crude oil futures contract for delivery in January 2025 over the last 5 years. (Source: oilprice.com)*
Weak demand from major buyers
In the first week of November, there were several events that were to take place that could determine the short-term, but also the long-term direction of the oil market. Apart from the US presidential election, which was the most important, the US Fed's decision on interest rates was also expected. The easing of monetary policy could gradually weaken the USD over the next few months and, as it is the main currency in oil trading, could push the price upwards. [1] However, in the US, production is expected to increase in the future, so combined with high inventories, oil could ultimately become cheaper.2 In the same week, economic data from China was also on the agenda, namely the trade balance and the inflation rate for the past month. Weaker industrial activity in that country over the past few months has led to lower consumption of various commodities, including black gold. The negative sentiment has not yet been helped by the government's announced stimulus, as the extent of the stimulus is unclear apart from the 0.25% interest rate cut in October.[1][2]
Canada wants to limit emissions
The gradual transition of countries to a green economy, which means phasing out fossil fuels, of which oil is clearly one, is also playing an important role in the oil market. Such moves are largely unpalatable to suppliers and industrialists who depend on fossil fuels for their livelihoods, whether they are individual companies or entire countries and groupings. A case in point is Canada, which on Monday 4 November 2024 published draft regulations to limit greenhouse gases from the oil and gas industry. The goal is to reduce total emissions from this sector by 35% by 2030 compared to 2019. The proposal has sparked a wave of criticism from industry producers who have warned that it will bring with it job threats, a decline in production and an overall weakening of the Canadian economy. However, the government said the main concern is that these manufacturers invest in more environmentally friendly technologies. The trend towards reducing global emissions is therefore contributing to the long-term global weakening of demand for oil. [3]
Market risks
From the point of view of investors betting on the value of oil to rise, there is a risk in the form of a possible surplus next year. Indeed, if OPEC+ members end their efforts to curb supply, this could cause a collapse in black gold prices. [3] The uncertainty was recently reflected, for example, when Saudi Arabia, the world's largest supplier of the commodity, abandoned its target price of USD 100 per barrel. The country wants to focus on regaining market share rather than raising prices. Other member countries could follow Saudi Arabia's lead, with a situation similar to 2014-2016, when OPEC flooded the market with oil and prices collapsed to below USD 30 per barrel. [4] In the shorter term, however, there is also the risk of widespread conflicts in the Middle East or Ukraine, which could restrict oil supplies and, in turn, drive up prices in the short term.[4] [5]
Adam Austera, Senior Analyst at Ozios
* Past performance is no guarantee of future results
[1], [2], [3], [4], [5] Forward-looking statements are based on assumptions and current expectations, which may be inaccurate, or on the current economic environment, which may change. Such statements are not guarantees of future performance. They involve risks and other uncertainties that are difficult to predict. Results may differ materially from those expressed or implied by any forward-looking statements.
[1] https://www.investing.com/news/commodities-news/oil-prices-rally-15-as-opec-delays-production-hike-3698646
[2] https://www.investing.com/news/commodities-news/oil-edges-down-ahead-of-us-election-china-npc-meeting-3701029
[3] https://www.investing.com/news/world-news/canada-proposes-sharp-cut-in-oil-and-gas-sector-emissions-by-2030-3700780
[4] https://www.tradingnews.com/news/oil-prices-struggle-opec-output-increase-and-weak-demand-push-brent-below-72
