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OPEC Image Credit: Reuters

Global markets, holding their breath over a delayed decision on the tapering of oil production cuts has had its moment of sigh of relief over the weekend as the energy producers’ group allowed for 400,000 barrels per day (bpd) in increased output.

The additional supply in the markets is going to have a huge and immediate impact on the prospects of global economic recovery that was looking increasingly bleak due to the rapid spread of the Delta variant of Covid-19 virus and the surging inflationary pressures fuelled by the rising oil prices.

Support to macroeconomic fundamentals

Opec+’s decision to supply the market with more oil clearly will be a support to the macroeconomic fundamentals of many emerging economies that have huge import dependency to meet their domestic oil demand.

While the uncertainty on direction of the pandemic persists, the nascent economic recovery across the world has been under threat from rising inflation driven by rising commodity prices, translating into higher consumer prices and potential longer term macroeconomic instability in many countries caused by huge negative trade balances, currency depreciation, a spike in external debt and or a cocktail of all of the above.

The news of additional oil supply in the near term has capped the price surge. The fact that baseline production levels were raised means more oil supply will be coming back than expected, and clearly is a matter of big relief for economies that were facing the prospect of long-drawn stagflation.

Crude oil’s yearlong surge has been sputtering for most of the last two weeks with the prospect of new supply undermining the case for higher prices. However, a closer look at the new deal shows, the Opec+ agreement is fully aligned to the view that producers should focus on maintaining a tight physical market all the while guiding for higher future capacity.

The recent deal has removed a significant portion of the supply curbs that have been a cornerstone of the market for a year. On the one hand, increased production is bearish in the short-term for oil prices, as Covid-19 demand concerns coincide higher supplies.

However, over the longer-term, it is net positive for both producers and consumers as Opec+ cohesion remains intact and market is saved from worries of production glut or an extreme supply squeeze.

Clearly, the big take away from the weekend deal is the maturity of decision making among the oil producers and Opec+ has once again demonstrated its ability to resolve differences and stay on its core target of market stability.