What is OPEC+ and How Does It Impact Oil Prices?

DUBAI (Reuters) – The Organization of the Petroleum Exporting Countries (OPEC) and its allies, collectively known as OPEC+, will convene on June 2 to discuss their cooperative oil production strategy.

Key Facts About OPEC+ and Its Role

What Are OPEC and OPEC+?

OPEC was established in 1960 in Baghdad by Iraq, Iran, Kuwait, Saudi Arabia, and Venezuela with the goal of coordinating petroleum policies and ensuring fair and stable oil prices. It currently comprises 12 nations, primarily from the Middle East and Africa, collectively accounting for approximately 30% of global oil production.

Over the years, OPEC has faced challenges that have occasionally led to internal discord. The recent global shift toward cleaner energy and a gradual move away from fossil fuels pose potential threats to its influence.

In late 2016, OPEC expanded to form the OPEC+ coalition, which includes 10 prominent non-OPEC oil exporters, prominently featuring Russia.

OPEC+ is responsible for around 41% of global oil production, with its main objective being to regulate oil supply in the global market. Saudi Arabia and Russia lead the group, producing approximately 9 million and 9.3 million barrels per day, respectively.

Angola, which joined OPEC in 2007, withdrew from the group at the beginning of this year due to disagreements over production levels. Similarly, Ecuador exited in 2020, and Qatar left in 2019.

How Does OPEC Influence Global Oil Prices?

OPEC states that its member countries’ exports account for nearly 49% of global crude exports, and estimates indicate that they hold about 80% of the world’s proven oil reserves.

Due to its significant market share, OPEC’s decisions widely impact global oil prices. Members convene regularly to determine oil sales volumes for the global market. Consequently, reducing supply in response to dwindling demand tends to elevate oil prices, while increasing supply generally leads to price reductions.

Currently, OPEC+ is cutting production by 5.86 million barrels per day, which equates to about 5.7% of global demand. This includes 3.66 million barrels per day in cuts scheduled to last until the end of 2024, alongside an additional 2.2 million barrels per day in voluntary cuts from some members, which are set to expire at the end of June.

The June 2 meeting may decide to extend these voluntary cuts for several more months, led primarily by Saudi Arabia, which has proposed a cut of 1 million barrels per day.

Despite these significant production cuts, oil prices remain near their lowest for the year at around $81 a barrel, having dropped from an apex of $91 in April, affected by high inventories and concerns regarding global demand growth.

How Do OPEC Decisions Affect the Global Economy?

The producer group’s supply adjustments have notably influenced the global economy.

During the 1973 Arab-Israeli War, Arab OPEC members implemented an embargo against the United States in retaliation for its military support to Israel, prohibiting oil exports to the U.S. and its allies and reducing oil production. This embargo strained an already vulnerable U.S. economy dependent on imported oil. The resultant surge in oil prices led to soaring fuel costs and shortages, pushing several economies toward the brink of recession.

In 2020, prices plummeted due to the COVID-19 pandemic. To counteract this, OPEC+ cut oil production by 10 million barrels a day, which represented about 10% of global output, aiming to stabilize prices.

Gasoline prices play a crucial role in U.S. politics, particularly in an election year, leading to multiple calls from Washington for OPEC+ to increase oil output.

OPEC maintains that its role is to regulate supply and demand rather than set prices. Its members heavily rely on oil revenue, with estimates suggesting that Saudi Arabia requires oil prices to remain between $90 and $100 a barrel to balance its budget.

Capacity Dilemma

In addition to production cuts, OPEC+ is anticipated to evaluate its members’ production capacities, a typically contentious subject.

The group has engaged three independent firms to assess the production capacities of all OPEC+ members by the end of June. These capacity estimates are crucial for establishing baseline production figures, from which any cuts will be determined.

Member countries often advocate for higher capacity estimates to secure larger production quotas, ultimately translating to increased revenues post-cuts. This need for new quotas arises as some members, like the United Arab Emirates and Iraq, work to expand their production capabilities, while Saudi Arabia, the largest OPEC producer, has opted to scale back on output potential. Moreover, Russia’s production capacity has been effectively hampered by the ongoing conflict in Ukraine and accompanying Western sanctions.

Which Countries Are OPEC Members?

Current OPEC members include Saudi Arabia, the United Arab Emirates, Kuwait, Iraq, Iran, Algeria, Libya, Nigeria, Congo, Equatorial Guinea, Gabon, and Venezuela.

Non-OPEC nations within the global OPEC+ alliance include Russia, Azerbaijan, Kazakhstan, Bahrain, Brunei, Malaysia, Mexico, Oman, South Sudan, and Sudan.