Is Opec about to boost global oil supply?

Mary McDougall
Source: Getty

Opec is divided over the future for oil production.

The Organisation of the Petroleum Exporting Countries (Opec) consists of 14 oil exporting nations aiming to control the supply and price of global oil. By coordinating policy, the members hope to secure an efficient supply of petroleum to consumers, a steady income to producers and a fair return on capital for investors. The institution agreed production caps in November 2016 targeting 32.5m barrels per day following a crash in global oil prices.

Q. What's happening tomorrow (22 June)?

Energy ministers are gathering in Austria to determine the future of global oil output. Saudi Arabia and Russia – with support of major consumers India, China and the US – are calling for a loosening of production restrictions to boost global supply and lower prices. Countries with a lack of spare capacity, including Iran, Iraq and Venezuela, are resistant. Production has been subdued in recent months due to unexpected outages in Venezuela, Libya and Angola. Iran’s output is also anticipated drop when Trump’s sanctions come into effect later this year.

Q. Why does it matter?

Oil prices affect everything connected with a modern economy, from movement of goods and services, to the amount of disposable incomes for ordinary consumers.

When the oil price is too high, economic growth is constrained as individuals and companies feel compelled to cut spending. When it’s too low, oil companies cut back operations and lay off thousands of workers. Opinions vary on what the sweet spot for oil prices is but analysts suggest somewhere in the region of $60 to $70 per barrel for brent crude oil. The current price is about $74 and has reached highs of $80 this year. If tomorrow's meeting results in a boost to global production, that will put downward pressure on prices.

Read more: Opec’s next move

Q. What countries are involved?

The Opec members are Iran, Iraq, Kuwait, Saudi Arabia, Venezuela, Indonesia, Libya, the United Arab Emirates, Algeria, Nigeria, Ecuador, Gabon, Angola and Equatorial Guinea.

A further 10 countries agreed to participate in Opec’s supply cuts, with Russia, Kazakhstan and Mexico as the leading producers. Compliance with the restrictions between these countries has deteriorated, however, with only 3 of the 10 nations honouring their pledges last month. Among those who failed to do so are Russia, responsible for more than half of the non-Opec cuts, and Kazakhstan, which increased output to the highest level since the start of the curbs.

Q. What's the anticipated outcome?

Current restrictions were due to be in place until the end of 2018 but most commentators expect the meeting will result in some degree of production increase. Saudi Energy Minister Khalid al-Falih said today the world needed at least an extra 1m barrels per day to avoid a shortage in the second half of 2018. Iran had been expected to oppose any rise in crude output, but has now signalled it may support a small increase, Reuters reported.

Q. What do experts think?

The market has already priced in the loosening of restrictions, according to JDF Brokers. “we expect the [market] reaction on the final deal to depend on the actual number agreed.”

The summit is “proving a tricky one to predict” said Eric Lascelles, Chief Economist, RBC Global Asset Management. “We expect the big players to increase their production to some extent, whether a formal deal is struck or not.”

Read more: Opec member states to decide on raising oil production

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