OPEC+ may have overplayed their hand, now forced to deal with stagnant oil prices
ALBAWABA – Oil prices slipped on Monday to $74.85 and $70.96 per barrel of Brent and West Texas Intermediate (WTI) crudes, respectively, according to Reuters.
Brent crude futures fell $0.73, or 0.97 percent, while US WTI crude for July delivery slipped $0.73, or 1.02 percent, as US debt ceiling talks stall and demand recovery in China offset the market.
Meanwhile, a series of production cuts was enacted over the past few months by members of the Organisation of the Petroleum Exporting Countries (OPEC) and their allies (OPEC+). In addition to a decline in oil production in Canada.
Yet, oil prices continue to fluctuate, although on a downward overall trajectory.
Concerns about the economy of the United States (US) and rising oil importation costs seem to have anchored worldwide oil demand.
News on higher-than-expected US oil inventory levels also dragged on oil prices.
However, news on the Chinese demand recovery should have driven up oil prices, but it hasn’t.
What’s tethering oil prices in 2023?
Over the span of a year, oil has fallen nearly 33.5 and 35.3 percent on the barrel of Brent and WTI crudes, respectively, according to data provided by Trading View.
Oil peaked at $83.22 per barrel of WTI crude, on April 12, and $88 per barrel of Brent crude, on January 23. But has quickly fallen back to the $75 price range every time.
Up until the end of 2022, oil crudes traded mostly over the $80-85 price range.
Notably, the oil spike began in the early 2000.
In the year 2000, the average price per barrel of Brent crude stood at $28.5. It wasn’t until 2005 that oil breached the $50 barrier, according to data by Bloomberg.
It only breached the $100 threshold in 2011.
Since 2015, Brent crude has been swinging between $41 and $80 on the barrel.
Today, oil-producing countries are stuck in a predicament of their own making, as oil prices fluctuate and demand dwindles, in light of rising interest rates and inflation.
In more ways than one, the Organisation of the Petroleum Exporting Countries (OPEC) and their allies, members of OPEC+, have contributed to rising inflation levels worldwide.
To finance their wars, development efforts, budget deficits, and more, OPEC+ strived to maximise oil production and yields for the longest time. Until they ended up with no other option, but to conform to the global market, and cut production.
High oil prices drove inflation. Inflation forced central banks to raise interest rates. Countries whose currencies were pegged to the United States (US) dollar also had to raise interest rates.
Inflation has only now begun to slow in April, after more than a year of consecutive interest rate hikes.
Whether or not the decline in inflation is enough to start cutting interest rates is yet to be seen. But trader sentiments are shifting in favour of yet another rate hike in June.
This drove the costs of importing oil up for countries settling transactions in other countries, driving demand down, as governments reprioritized and sought other, more efficient energy options.
More so, for OPEC+ nations, who import most of their manufactured goods, inflation has become a major issue as the prices of the goods they import soared,
When adjusted by inflation, the $75-a-barrel oil of 2023 has the same purchasing power as the $55-a-barrel a decade ago, according to Bloomberg.
Back then, nominal oil prices were above $100 a barrel.
Over the past few years, many factors played into the soaring prices of oil, Bloomberg explained.
Between Covid-19 messing with the supply chains globally, Russia invading Ukraine, and Western sanctions on a number of oil-exporting countries, oil prices were bound to rise.
Now, to retain market shares and facilitate demand, by lowering the costs for importing nations, OPEC+ may have to opt for lower outputs, and perhaps even lower prices. At least until the inflation storm, as Bloomberg coined it, blows over.