The oil markets seem to have ignored the informal understandings between OPEC+ oil producing countries and the US to maintain a price level of $70-$75 per barrel. Market factors, especially strong demand and geopolitical tensions with a bit of speculation thrown in, remain the key determinant of oil prices, and raising it up to more than $96 earlier in the week.
What matters here is what will happen in the coming months as demand rises as a result of steady global economic recovery. Yes, this will coincide with concerns over political developments, especially the Ukraine-Russian crisis. There is also the relatively limited production capacity in OPEC+ countries.
During its meeting early this month, OPEC+ members decided to increase production - based on the previous agreement - by 400,000 barrels per day until next March, which reflects their belief that today’s price levels do not require their intervention.
Restrained approach on production
This shows that the OPEC+ group is in no hurry to bring prices down. In any case, the output cut agreement will expire next April, which may require a redistribution of quotas, especially as some member states that have excess production capacity are demanding an increase in their share. This is expected in light of the level of supply and demand in the oil markets. However, if the price of a barrel exceeds $100, there is a possibility that such a step will be taken any time.
A possible agreement on Iran’s nuclear programme is looming on the horizon in Vienna, after fulfilling part or most of the Iranian conditions. Washington has agreed, rather submissively, to separate the nuclear program from the rest of the military activities and Iranian interference in the internal affairs of other countries, which means an imminent pumping of Iranian oil for international markets.
Already flowing out
In fact, Iranian oil is already being traded in the markets, and allowing them to officially pump oil will not have a significant effect on the levels of supply. Oil markets had braced for this return since the Biden administration came to power last year.
The Iranian oil production is estimated at 2.5 million barrels per day, down from 4 mbd before the sanctions, of which 1.9 million barrels are consumed internally and 600,000 barrels exported, mostly to China, which imports 340,000 barrels at steep discounts in exchange for goods. This means Iran needs to increase its production capacity to contribute significantly to the global oil markets. In a best-case scenario, Iran’s increase will not exceed half a million barrels in the short-term, which the markets can absorb quickly due to the increasing demand. Yet, the Iranian oil issue will constitute an ideal opportunity for speculators to exploit it to achieve profits by manipulating prices.
As regards the next OPEC+ meeting in April, important decisions have to be made to maintain prices and overcome any disparities that may arise as a result of some changes that the markets may witness as a result of multiple factors. The upward trend of oil prices may continue this year, which means huge financial capabilities will be made available for the oil-producing countries, most of which will lead not only to the complete overcoming of their budgetary deficits but also the realization of surpluses.
This will contribute to additional development projects that would diversify their economies. The early signs of such a trend are showing up in the GCC countries.
-- The writer is a specialist in energy and Gulf economic affairs.