The Organization of the Petroleum Exporting Countries (OPEC) has a new policy agreement that has increased the number of barrels of oil its member countries and allies (OPEC+) can produce per day.
So, what does this mean for oil exporters?
In April 2020, OPEC+ approved an oil production cut by 10 million barrels per day due to the low oil demand, an effect of the COVID-19 pandemic. However, as the world is slowly recovering due to vaccine rollouts and increasing demand for oil, this has led to a surge in oil prices and has also caused OPEC to rethink the decision made last year and increase the production of oil by 400,000 barrels per day to the existing baseline production limit of each OPEC+ member from August 2021 till April 2022.
In September, another policy agreement was reached to increase oil production by an additional 400,000 barrels per day by November. The purpose of this new policy is to phase out the imposed production cuts to about 5.8 million barrels per day.
In addition to that, it has increased the baseline production limit of 4 of its member countries: Iraq, Kuwait, Saudi Arabia and the UAE and its major ally, Russia. It is said that this was done in exchange for the countries’ support of the new policy agreement. This followed after the UAE demanded an increase in its baseline limit alongside the Saudi-Russia price war that largely affected the oil market and reduced oil prices. Other member countries like Nigeria and Algeria were denied an increase in their baseline limit. Even with the increase in production, independent-oil producing countries and exporters are calling for a bigger increase to speed up global economic recovery from the devastating impact of the pandemic.
Nonetheless, this could mean good news for oil exporters since oil prices have surged to almost $80 per barrel, the highest in 7 years. Analysts have forecasted a possible surge of $90 per barrel by the end of this year despite the supply constraint, and since OPEC controls more than half of the world’s oil supply — with wide influence on the oil market — this new policy will boost oil prices and increase profits for oil exporters especially, members of OPEC+.
But oil reporters need to be wary and tread with caution as the delta variant of the coronavirus is still spreading and some countries like China are beginning to lock up again. This is of great concern to top oil exporters like the United States where the variant is thriving. Should a global lockdown occur again, this could mean debt for exporters as there would be a low demand for oil; in turn, the increased production would mean excess supply with no means of storage just like in 2020. Oil prices will in turn crash, and that’s bad news not just for exporters but for OPEC+ and other oil-producing countries. This could be the reason for OPEC’s initial reluctance to agree to increase oil production and eventually sticking to a gradual increase in oil production.
Also, OPEC members like Nigeria, Kazakhstan and Angola have struggled to raise production to the agreed level due to lack of investments and field maintenance, no thanks to the coronavirus pandemic. This could also lead to a supply gap and slow down the unwinding of the production cuts, thereby putting more pressure on countries like Saudi to produce more oil. While there is a huge demand for oil, the high prices might also cause some oil-importing countries to look for cheaper and sustainable alternatives to reduce their dependence on petroleum. This would also mean less demand. However, this doesn’t seem to be happening soon as the post-pandemic demand for oil is increasingly high.