The global oil markets are at an inflection point when it comes to prices, production and investments. These will help OPEC+ long term. Image Credit: AP

Oil prices surged to a four-month high early August driven by several factors. Primarily, there was an increase in seasonal demand with storage tanks filled in anticipation of the winter months.

Additionally, economic conditions in major oil-consuming nations improved, with new data providing more optimistic insights regarding projected oil demand for the remainder of the year and into the next.

The OPEC member countries recently reaffirmed earlier forecasts, thus expecting an increase in oil demand by 2.3 million barrels per day (mbd) for this year and the next. The International Energy Agency, in its August report, also indicated that average oil demand is expected to hit 102.2 mbd for this year.

However, production from OPEC members dipped in April, at 28.6 mbd, and further by 836,000 barrels per day in July to settle at 27.3 mbd, as per the organization’s monthly report. This decline can be attributed to members adhering to production quotas and the significant voluntary cut by Saudi Arabia.

This has brought about an equilibrium between supply and demand, even with augmented production from Brazil, Kazakhstan, and the US. Notably, the US seems to be re-evaluating its stance on shale oil production, particularly in light of the current administration’s environmental policies.

Taken together, the developments highlight a competitive tug-of-war over oil prices. This is evident between forces aiming to lower oil prices and those striving to maintain them at elevated levels. Oil, being a strategic commodity unlike others, ensures that fluctuations in prices carry substantial geopolitical implications, in addition to economic consequences.

Understanding the trajectory of markets and pricing in the short-term is important, more so with escalating global tensions in several hotspots. The direction of price trends hinges on the tussle between the combined prowess of OPEC+ nations and their adversaries seeking to undercut prices. Each faction wields distinct strategies, assets, strengths, and vulnerabilities.

A unified stance helps

Starting with the OPEC+ consortium, its strength is anchored in the solidarity and control over 40 per cent of global oil production, paired with 60 per cent of the world’s oil reserves. Consequently, any dissonance or lack of cohesion among members poses a significant risk, potentially leading to price collapses — this is their Achilles’ heel.

On the flip side, their adversaries boast leverage and supremacy over global trading markets and their intricate financial transactions, even sometimes resorting to speculative manoeuvres.

However, their weaknesses are manifold: their oil production doesn’t account for a significant share of the global total. Their domestic consumption often overshadows production, and their exports are predominantly technical due to oil quality concerns that may not always align with their refining facilities.

Finite oil reserves

Additionally, projections indicate a decline in their production in the near future due to finite reserves. This scenario inevitably points towards growing reliance on OPEC+ nations.

Such an overview illuminates the potential trajectories of oil markets and pricing in years ahead. Evidently, the balance of power appears to favour OPEC+, suggesting that the era of low-cost oil might be nearing its end. However, this necessitates OPEC+ to continue maintaining its internal unity, thereby circumventing vulnerabilities that could jeopardise its overarching interests.

Nonetheless, the upcoming period in the oil markets will see price volatility due to intense competition. Yet, the general trend is likely to maintain prices at comparatively elevated levels, favouring OPEC+ member countries. This shift, akin to the significant price surge witnessed in the mid-1970s, will undoubtedly impact the economic landscapes of these countries, bolstering the stability of their public finances and budget planning.

This paves the way for enhanced growth and a diversification of their economies.