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researcher associated with the Navarra Center for International Development
The energy markets have entered a new phase. After a period marked by great volatility - first due to the pandemic and then to the invasion of Russia, a country core topic on the energy scene, into Ukraine - we are now facing a scenario in which, despite markets reacting to the traditional laws of supply and demand, uncertainty has become a new player to be reckoned with.
The weight of OPEC
Although the Organization of the Petroleum Exporting Countries (OPEC) announcements seem to be the ones determining the direction of crude oil prices in the short and medium term deadline, the effects of the pandemic still persist, which, added to the prolongation of the war in Ukraine, are generating doubts about the true impact of the oil cartel's production decisions.
The combination of economic laws and uncertainty is evident in what happened in the global crude oil market in the spring of 2023. In April, the oil alliance, led by Saudi Arabia, announced production cuts with the goal aim of reaching a minimum price of $80 per barrel. But the results have not been as expected, with crude oil prices hovering around $70 to $75.
In view of this reality, at the beginning of June, OPEC member countries and their allies (OPEC+) decided to extend production cuts until 2024, which implies a daily reduction of some two million barrels in the world oil market.
This measure raises several questions and a dilemma that must be considered as a whole in order to understand what we can expect at Economics.
Challenges for the industry
OPEC+ faces considerable uncertainty regarding the evolution of global oil demand, driven by the performance of advanced economies.
China's recovery has been somewhat weaker than expected, in addition to the recession in some of Europe's strong economies, such as Germany and the UK. These factors raise doubts as to whether such production cuts can lead us back to a stifling status price hike like the one experienced in 2022, or whether (as might be expected) we will encounter moderate or mild price increases.
Also, with the pandemic over, environmental objectives are returning to the public discussion , prompting countries to avoid dependence on oil derivatives.
Although weak in absolute terms at the moment, the transition to fossil fuel-free energy sources adds a layer of moderation in possible impacts of crude oil production cuts.
However, the geopolitical impact of the tensions generated by the war, which has been affecting the stability of the world energy market and market prices since February 2022, remains a counterweight.
Seeking the break-even point
For their part, the oil-producing countries are seeking a balance that is difficult to achieve.
Since increases in the price of crude oil are passed on to consumers and businesses through changes in the price of gasoline and other oil derivatives, these increases play a significant role in inflation. Therefore, the strategy of production cuts -which seek to generate a sharp increase in prices-, could have undesirable short and medium term effects deadline for OPEC+ countries due to an increase in inflation.
If so, this could lead to further interest rate hikes fees , which could slow down the recovery, as well as weigh on the growth of those economies that are performing better. This, in turn, would have a negative impact on global demand for crude oil. Thus, the cuts would end up being counterproductive for oil-producing countries.
The core topic is, therefore, to cut production (to raise prices) without generating too much inflation in the economies.
It is important to note that the markets seem to have found mechanisms to mitigate the impact of the crude oil rises caused by the sanctions on Russia. The market seems to have found alternatives to allow the entrance to Europe of products derived from Russian oil. For example, through intermediaries located in countries outside the application of trade sanctions against Russia(such as India). Although they raise another subject of problems (ethical or skill), these subterfuges help to alleviate the Economics of the families.
Expectations for the future
At summary, given this scenario, it is expected that OPEC+'s decision to maintain production cuts will result in a slight or moderate increase in crude oil prices, which could generate a slight rebound in inflation.
However, this impact could be alleviated in the prices of fuels and other derivatives, as long as the market manages to maintain the effective import of Russian products via third countries.
All this, without forgetting that the continuity of the conflict on European soil, and with an energy player core topic involved, introduces an element of uncertainty which, depending on the evolution of the conflict, may be of greater or lesser importance.