Sunday, December 10, 2023

OPEC cuts: how does it affect the price of oil?

A little over a month ago, the Organization of Petroleum Exporting Countries (OPEC) announced its most recent cut, from 1.16 million barrels per day. This follows another of about two million barrels per day in October 2022. The interesting thing is that the news immediately led to a 5% increase in the price of oil on international stock markets.

In 2020 alone, the group reduced the production by more than nine million barrels per day in response to the pandemic. This is because, when the countries were blocked, the oil price Crude plunged due to a lack of buyers. By contrast, after the Russian invasion of the Ukraine, prices shot up to more than $130 a barrelbut in March of this year they had fallen to 15-month lows, to just over US$70 a barrel.


OPEC, which is made up of 13 members which are mainly countries in the Middle East and Africa, was formed in 1960 as a cartel with the aim of fixing the world’s supply of oil and its price. For its part, OPEC+ is a group of 23 countries exporters that meets regularly to decide how much crude to sell on the world market.

The latter dates from 2016, when oil prices were particularly low. Back then, OPEC joined forces with other 10 producers of oil to create OPEC+. Members of the first organization alone produce about 30% of the world’s crude oil, pumping more than 10 million barrels per day.


To understand how the cuts it would be necessary to look back, specifically at how the market has reacted to the organization’s announcements. For example, in December 2019, OPEC announced that it would cut oil production in 500,000 barrels a day, a figure that was added to the 1.2 million barrels that it had already erased earlier in 2018.

Faced with this news, the barrel of Brent, a reference in Europe, initially rebounded close to 2%, although it had moderated the rise to around 1%. In fact, since November of that year, Brent oil futures have traded in a range from US$60 up to US$64.

For its part, the WTI or West Texas Intermediate, a reference in the US, on December 3, 2019 had a price of around US$56.10. One month after the announcement, in January 2020, the cost per barrel had risen to US$63.05.

In April of that year (2020), when the pandemic had already started due to covid-19announced that world production would be reduced by 9.7 million of barrels per day. This agreement would be in force between May 1 and June 30 of the current year, in its initial phase.

Prior to that period, on April 20, 2020, the price of oil had a negative figure that will be forever remembered in economics books. WTI crude entered negative territory for the first time in history. However, by May 1 it cost $19.78 and on June 29, US$39.27.

At the beginning of May, both the WTI and the Brent maintained an upward trend with the entry into force of the global agreement on reduction of 9.7 million barrels per day in oil production, which would decrease progressively, being 7.7 million barrels per day from July to December 2020 and 5.8 million barrels per day, from January 2021 to April 2022.

As a result, in December of that year he reached his Maximum price of that period, positioning itself at US$49.10. By January 14, 2021, the price had risen to US$53.57 and by March 5, to US$66.09.

Although it experienced drops in the following months, on July 1 it closed at $75.23. For that date, production was around 5.76 million b/d. However, starting in August (2021), OPEC and independent producers increased extraction at the rate of 400,000 b/d monthly and planned to end the cuts in September 2022.

That year (2021), the price of a barrel reached its maximum on October 26 when it was positioned at $84.65. Consequently, a month later, the United States announced that it would release 50 million barrels of crude from its strategic reserves in coordination with China, Japan, India, South Korea, and the United Kingdom, in an attempt to curb the price of oil. By December 1, it had decreased to US$65.57 a barrel.

By the beginning of 2022, the price of a barrel of oil had been positioned at US$76.08. In March of that year, Brent maintained an upward trend and closed at US$127.98 per barrel, 3.87% more than at the end of the previous session. In June, the average price of a barrel of OPEC crude was $117.72, compared to US$113.94 in May, which represented a 3.32% increase. In June, specifically on the fifth of that month, it reached US$120, the maximum in 5 years for WTI.

Although the agency indicated that it could end the extraction in September, it was in October when the group of exporting countries announced a cut of 2 million barrels per day, which was added to the 100,000 barrels cut announced in September. That was the cartel’s biggest cut since 2020.

By early October, as a result of the announcement a month earlier, it had risen to $92.64, after closing at $79.49 a week earlier. However, by December it had dropped to $71.02. Since then, its lowest price was presented in March 2023 when it closed at US$66.74 and the highest, a month later, when it was listed and closed at US$82.52.

The price increase coincided with the announcement by Saudi Arabia and other OPEC+ oil producers that they revealed voluntary cuts in their production worth around 1.15 million barrels.

How are oil prices determined?

As detailed by the Statista portal, as is the case with most of the raw Materialscrude oil prices are affected by supply and demand, as well as inventories and market confidence.

However, since oil is most often traded in futures contracts (where a contract is agreed upon, while delivery of the product will follow in the next two to three months), market speculation is one of the main drivers. determinants of oil prices.

They note that traders are reaching a conclusion about how production and consumer demand are likely to develop in the coming months, leaving room for uncertainty. Spot prices differ from futures in that they reflect the current market price of a commodity.


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