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Due to restrained production, oil prices this year have already seen an over 25 percent surge. The prices are expected to increase even higher as summer travel season comes around the corner.
The Organization of the Petroleum Exporting Countries, along with its allies, have decided to restrict the supply of oil in the international market. These decision-makers are collectively known as OPEC+ and this particular move has resulted in a drastic increase in oil prices.
Factors that further prevent a recovery in prices include obstacles such as ineffective vaccine distribution, deteriorating global economy, and a possibility that trade sanctions on Iran might be lifted – now that Joe Biden is the president.
The oil industry has taken a 360 degree turn for good within the last two years. During the pandemic-led global lockdown, oil prices had decreased drastically last year – dropping to almost a negative $37.63 per barrel. However, as of April 21, 2021, the US benchmark West Texas Intermediate (WTI) crude futures are already back to the pre-pandemic levels of $61.35 per barrel.
According to Regina Mayor, who is the global energy leader at KPMG, people were not expecting that prices would increase this soon, which she believes is the result of a pause in oil production. Mayor also cautioned that OPEC+ has spare capacity to produce over 5 million barrels per day on the sidelines.
OPEC+ might be enjoying the price increase, but also understands that it will need to increase production if it encounters any threats related to supply that may also arise from US shale oil production.
OPEC+ had restricted a supply equivalent to 8 million barrels/day including the 1 million barrels per day voluntarily cut by Saudi Arabia. However, it has recently announced lifting the regulation step-by-step. The organization plans to increase the daily production limit by 350,000 barrels in May and June respectively. In July OPEC+ would increase the daily production by 441,000 barrels.
Right now OPEC is a monopoly. However, it may face severe competition if the ongoing negotiations between Iran and the US turn out to be successful. Iran has a huge oil supply, which it cannot sell to any country due to economic sanctions. In July 2015, Iran had signed an agreement with the US and six other countries agreeing that it will refrain from developing nuclear weapons and in return the sanctions imposed on it will be lifted gradually. However, the Trump administration re-imposed the sanctions and the relations between the US and Iran got strained again. With Joe Biden in the White House, Iran wants to revive the deal to get the sanctions lifted – this means that Iran’s oil might be available in the market sooner.
According to Adam Karpf, a managing director at CIBC Private Wealth, U.S., OPEC+ must have already factored in Iran’s threat and for now the market is more focused on the demand side rather than any other supply threat. According to the monthly report of the International Energy Agency, demand for oil in 2021 would increase 230,000 barrels a day to 5.7 million barrels a day. This means that OPEC+ can still solely control oil prices for a significant period of time.
However, the emergence of new variants of COVID-19 would attract new travel restrictions, which is a significant threat to OPEC+. In addition to that, the global economy is already in the recovery phase, which may collapse if another global lockdown is imposed. But since the vaccine is already out and people who are vaccinated are allowed to travel, there’s a ray of hope for OPEC+ that the summer travel season would drive the prices up.