We all know how addicted the world is to oil. In this context, the Organization of the Petroleum Exporting Countries (OPEC) plays a major role in shaping global oil market trends. Made up of fourteen oil-rich countries, OPEC meets biannually to decide on production limits that heavily dictate the price of oil on the global market. The next round of markup is scheduled for Wednesday. From there, we’ll have a follow-up session on Saturday where we will be assessing our outcome and progress.
Though intended to help OPEC member countries, the collective decisions made by OPEC reverberate throughout the global oil market. When OPEC decides to cut production quotas, it is simply making a decision to restrict supply, which tends to push oil prices higher. On the other hand, more production usually means more supply and thus lower prices, caused by the expansion of supply itself. OPEC’s power extends well beyond the borders of its member countries. Its decisions often match up with the U.S. Energy Information Administration (EIA), getting within 1% of each other’s answers 75% of the time.
OPEC is already preparing for its December meetings. The oil market will be watching carefully, as they should, fully aware that such decisions can have detrimental effects to economies worldwide.
Understanding OPEC’s Structure and Function
Founded in 1960, OPEC includes twelve member nations: Algeria, Angola, Congo, Equatorial Guinea, Gabon, Iran, Iraq, Kuwait, Libya, Nigeria, Saudi Arabia, and the United Arab Emirates. This organization harmonizes oil policies within member countries. Its mission is to provide equitable and consistent pricing for the oil and gas producer.
OPEC’s most powerful means of impacting the market is through its production quotas. During these meetings held twice a year, member nations evaluate the global market landscape and determine production levels for each country. These quotas are important because they set the total supply of oil in the global market.
It’s when production is artificially tuned down to create more constrained supply conditions that things get dicey. This tightening effect almost always creates an upward pressure on oil prices. If OPEC members agree to increase production, the resultant oversupply can drive prices down, affecting revenues for oil-producing countries and impacting global economic stability.
The Role of OPEC+ in the Oil Market
Over the last few years, the power of OPEC has only increased. Integral to this expansion has been the creation of OPEC+, now comprised of ten non-OPEC countries, led most prominently by Russia. This expanded coalition strengthens OPEC’s cooperation on oil production and pricing strategies. In turn, OPEC+ has emerged as a powerful swing player on the worldwide oil stage.
This cooperation between OPEC and non-OPEC countries is an effort to stabilize the oil market by working together to control supply. This partnership continues to best demonstrate its value during periods of extreme price fluctuations. It becomes vital as well when geopolitics threaten oil supply chains.
Now, some background about how OPEC+ makes these impactful decisions. These decisions have a ripple effect around the world on consumers and economies. Countries that rely heavily on oil imports often adjust their economic forecasts based on expected changes in oil prices driven by OPEC+ decisions.
The Upcoming Meetings and Market Expectations
As OPEC gets set to enter its important meetings this week, analyst and market participants alike are watching closely, and with good reason. Our opening session on Wednesday will be a deep dive into today’s market landscape and what’s driving production throughout our member countries. After this first instance, a second session on Saturday would determine any changes to the schedule based on direct market response and feedback from buyers.
In the last 20 years, OPEC’s policy choices have provided excellent advance signals of the direction in which markets were headed. Historically, OPEC’s estimation outcomes have been very close to what the EIA subsequently reports. Investors often use these learnings to inform their own trading patterns.
Due to this disconnect, market sentiment can change drastically depending on speculation about what OPEC plans to do before the meetings. Market participants closely scrutinize every public utterance from member states. … as well as leaks regarding production tactics to figure out how to best project them forward into more favorable results.