OPEC has been handling the supply side of things quite well. Those moves to curtail production is fetching results. Image Credit: Shutterstock

Oil prices are still facing the downward pull, even as opposing market dynamics seek to maintain or even raise them, particularly in the event of a US dollar value decline. And which typically occurs to compensate for the reduced real value of oil sales by exporting countries.

Just recently, the ‘war of prices’ intensified, with OPEC+ members demonstrating their ability to navigate this competition to ensure fair returns on their oil exports and derivatives. Despite a temporary drop in prices to just under $80 per barrel - a threshold exporting nations are keen to avoid crossing - the decisions and statements from OPEC+ states assert their continued market leadership through controlled production levels.

Prices dipped following the latest release of economic data from major oil-consuming countries and along with an uptick in oil inventories. But the lack of independent sources allowed speculators to capitalize on potential profit opportunities.

Saudi Arabia's response

The response from OPEC+ was decisive, particularly with Saudi Arabia's announcement to rescind its prior decision for 2021. Initially, the plan was to increase production capacity to 13 million barrels per day by 2027; t now, the decision is to maintain total capacity at 12 million barrels.

Saudi Arabia, boasting the largest surplus production capacity among the grouping, sent a clear signal to the markets - any supply shortage would lead to an imbalance between supply and demand levels. This move had a positive impact on prices, pushing them above $80.

Shortly thereafter, UAE Energy Minister Suhail Al Mazrouei reiterated the UAE’s commitment to collaborate with OPEC+ partners to stabilise the global oil market. This was echoed by others from the group, including Iraq's Oil Minister Hayyan Abdul Ghani, who affirmed Iraq's adherence to OPEC's production decisions, pledging not to exceed 4 million barrels per day.

Our mission in OPEC is to be attentive to any movements in the market, and we are ready to increase or decrease production as necessary

- Prince Abdulaziz bin Salman, Saudi Energy Minister

The collective stance bolstered prices further, reaching $83 per barrel. Saudi Energy Minister Prince Abdulaziz bin Salman moved to allay supply concerns, stating that the OPEC+ grouping stands prepared to adjust oil production policy as needed. He added: "Our mission in OPEC is to be attentive to any movements in the market, and we are ready to increase or decrease production as necessary."

This was confirmed by the Secretary-General of the organisation, Haitham Al-Ghais, when he said, "Voluntary production cuts demonstrate inherent flexibility in OPEC+'s approach to market management."

Importing countries must respond in good faith

This flexibility by OPEC members highlight their commitment to ensuring stable oil supplies and preventing any shortages while safeguarding their right to fair prices. It is expected that importing states understand and respond to these efforts, avoiding tensions aimed at driving prices to unsustainable lows.

Such attempts have proven ineffective over the past three years, underscoring the need for cooperation with OPEC+ members to stabilise oil markets. The group consistently demonstrates readiness to cooperate and coordinate with importers, including increasing supplies when prices spike sharply, thereby safeguarding the global economy and account for the economic conditions of importing countries, particularly developing nations.

Oil market stability cannot be frittered away

A reciprocal understanding is necessary in instances of prices dipping below the red line set by OPEC+, as prioritising the interests of all parties is crucial for market stability. Adopting this approach by both sides can mitigate the adverse effects of volatile fluctuations in oil markets, benefiting OPEC member-states and the global economy.

There appears to be a growing recognition of this facet, within a recent study by the US Federal Reserve. It said: "OPEC's decisions bolster the stability of oil markets due to their credibility."

That does sum up the situation well…