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Business Analysis

OPEC+ chose the best option available – maintain status quo

Any failure to curb production would have magnified risk of an oil price collapse



OPEC+ handled the outcomes from its latest meeting quite well, as evidenced by the tight price band oil is moving in.
Image Credit: AFP

Once again, the OPEC+ grouping proved its cohesiveness and strong bargaining position despite doubts cast prior to its recent meeting. Doubters sometimes say that there are differences amongst the major oil-producing countries, while at other times they claim that there are violations in members’ commitment to the oil output cut.

In contrast to these doubts, OPEC+ responded with a strong response following the meeting, as shown by member countries unanimously renewing their commitment to voluntary oil production cuts and extending it until the end of 2024, rather than the end of 2023.

This is in addition to Saudi Arabia’s pledge to a new and voluntary cut of one million barrels per day for July, which could be extended further. As the issue involves the 23 countries that comprise OPEC+, it is normal to have some disagreements, but they eventually agree on a formula that works for everyone for reasons that will be discussed later.

There is a natural disparity between the group’s countries on political, regional and international interests - but these are excluded from their respective oil policies for the same reasons. This cohesiveness demonstrates the maturity of the group’s members, who prioritise their national interests over the rest of the considerations.

There are two equations, for example, the first of which assumes that massive oil output leads to quick depletion of oil resources and fewer profits owing to subsequent price collapse. The result is quite negative.

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The second implies that limited output contributes to the preservation of oil resources and higher returns due to fair prices, which creates prospects for a highly positive outcome.

OPEC+ latest decision flies under the radar

This obvious fact calls for putting aside all differences among the group’s countries and prioritising their interests and development needs to avoid oil price collapse and expose their economies to crises. To protect their interests, it is expected that the countries of OPEC+ will stick to this policy.

Surprisingly, neither the consuming countries nor their media outlets criticized the organisation’s decision at its most recent meeting, a move that confirms the soundness of OPEC+’s policy.

The reason for this is that the group’s decisions taken at its recent meetings, including last week, did not result in an increase in oil prices, but rather kept them below $80 per barrel. Such prices are appropriate for the current state of the global economy and do not affect consuming countries while maintaining a fair price for producing countries.

A grave risk of oil under $30

Assuming that the OPEC+ countries had not made any production cuts, oil prices could have dropped to less than $30 per barrel. This would lead the economies of the producing countries, including the GCC, to lose the growth momentum they currently enjoy, posing economic and social challenges that cannot be easily overcome.

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This is especially true given that the prices of all products, including food, are rising rapidly, resulting in high import costs in oil-producing countries, which must obtain fair prices for their exports to be able to pay the value of these imports and avoid widening trade deficits.

The global economic conditions are marred by ambiguity, whereby the International Monetary Fund has lowered its forecast for global economic growth from 3.4 per cent in 2022 to 2.8 per cent this year. This slowdown primarily affects developed economies, where growth will fall from 2.7 to 1.3 per cent, while some will suffer from recession and negative growth.

Pressure will remain intense on OPEC+

Consequently, the group’s forthcoming meetings will take on greater significance, as the challenges are serious. The attempts to undermine the solidarity of the organisation’s countries with the goal of reducing oil prices and causing them to collapse will continue.

This is simply because the competition revolves around the interests between producing and consuming countries. These interests gain exceptional importance in view of economic and geopolitical crises, requiring OPEC+ member nations to retain their cohesion as the only guarantee to maintain their gains.

The group will continue to closely monitor market developments to maintain supply and demand levels, and thus maintain current prices, whether by cutting production again or increasing it in the case of growing demand, according to the two equations referred to earlier.

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Mohammed Al Asoomi
The writer is a specialist in energy and Gulf economic affairs.
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