OPEC and its non-member allies (most notably Russia) met last week to discuss the future of the oil market. In a testament to oil’s volatility, the gathering took two days extra as countries struggled to find a compromise. Here are the latest developments regarding OPEC+ and what that entails for the oil market.
OPEC’s Efforts to Balance the Market
When the oversupply crisis first began on the oil market a few years back, OPEC seemed unified. The petroleum-exporting countries all saw the need to limit production in order to allow prices to grow. Despite the United States doing the opposite, OPEC’s plan worked, more or less.
However, with prices stabilizing, opinions began to diverge. Some countries within the bloc wanted to produce and export more to reap the benefits of the higher price. Russia, who adheres to OPEC’s agreements voluntarily, is the strongest voice in that camp. Higher oil prices meant a reprieve for the economies of countries whose GDP is highly dependent on oil exports.
The plan was to gradually start selling more oil in 2020 and 2021, but then the coronavirus pandemic happened. The tourism and transportation industries, so tightly linked, both fell victim to Covid-19, causing an unprecedented drop in demand. As a result, OPEC+ had to reign in its appetite and keep output levels tight for longer.
Thanks to the development of several successful Covid-19 vaccines, December brought hope for the oil market. After all, if the virus disappears, the demand for oil will increase as people begin to travel again.
Thus, countries like Russia and the United Arab Emirates wanted to start selling more oil again. They championed a bump of 2 million BPD come January. Saudi Arabia, on the other hand, was proposing keeping the output level steady in the first quarter of 2021.
In the end, OPEC+ members found a compromise. They agreed to increase production but by far less than what more aggressive members were asking for initially. Thus, oil output will increase by 500,000 barrels per day starting January.
2021 Oil Forecast
Though the market was hit pretty hard this year, OPEC is optimistic about 2021. The bloc’s forecasts show that a demand for 6.2 million barrels per day is not out of the question next year.
In fact, with oil production slowing down outside of OPEC, the market may finally become undersupplied in 2021. That is, if OPEC’s projections for the growth of demand are accurate. If the demand for oil exceeds the supply, prices will soar quickly.
The key issue next year will be how quickly the world brushes off the coronavirus pandemic. Until most of the world’s population has the vaccine, there will be outbreaks of Covid-19. With those come lockdowns and travel bans, which will limit demand.
Thus, the progress with vaccinations and the extent of the lockdowns in Q1 next year will be crucial to understand the future of the oil market. In addition, OPEC’s internal dynamics – the ability of members to find common ground – will also play a part.
At this point in time, cautious optimism seems to be the most sensible outlook. You can start trading oil with SuperForex today.
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