OPEC, or to be more precise OPEC+, has struck another deal to smooth out volatility from the oil markets. Image Credit: AP

The deal reached by OPEC+ to raise the oil production baseline of five member-states and extend the deal until the end of 2022 has helped it overcome a big obstacle. The deal will obviously contribute to stability in the oil markets by creating the required balance to maintain fair price levels during the rest of this year and the next.

This clearly demonstrates that the organisation has become a regulatory body that controls oil prices and market balance. Without the group’s efforts, an imbalance can be set off and worsen market dynamics.

Therefore, the latest deal is an achievement by all measures. It has satisfied countries that have excess production capacity, by raising their output baseline with the acceptance of other countries that do not seek to raise their production levels. This means maintaining the OPEC+ agreement by increasing production by 400,000 barrels per day monthly, starting from August until the end of this year.

Opportune deal

Oil markets can absorb this increase due to the expected demand spike. However, some developments need to be considered as the global economic situation remains fragile due to the COVID-19 variants. This development has led to new closures by some major economies, particularly in Europe, which suffer a division in their societies between pro- and anti-vaccination adherents. Any prolonged lockdown will affect oil demand.

Given the uncertainty surrounding the extent of the epidemic, Goldman Sachs has cut its forecast from $80 to $75 a barrel in the coming period. But an aspect that may be considered positive is that a group of major oil-consuming countries, particularly the US, recently used part of their inventories to influence price cuts, particularly after the price of a Brent barrel touched $78. This means they will have to refill their inventories before winter to avoid any shortages that may occur.

Forward stability

However, these swing factors are fertile ground for speculators. There have been significant fluctuations between $68-78 within a month, before settling at above $70 following the OPEC+ agreement. This is expected to continue through the remaining five months of the year, but less severely than what happened in July.

The deal constitutes a strong guarantee of price stability at rates approaching or exceeding $70, which is a comfortable price for oil-producing countries to meet most of their financing needs if global economic conditions stabilise and the pandemic does not spread significantly again.

Other factors that may affect price levels and end up being exploited by speculators, such as the return of Iranian oil exports, seem unlikely in the present, which OPEC has taken into account. Also, there is a possibility of a further decline in US shale oil production, which will contribute to a supply shortage of 1 mbd to 1.5 mbd by the end of the year if economic recovery continues unhindered by the pandemic.

These developments indicate the importance of OPEC+ as a ‘regulatory’ entity. Without its influence, oil prices would collapse, requiring group members to maintain prior agreements and reach compromises. This means stability for global oil markets and fair prices that will provide the funds necessary for government budgets.