When I was at University, I was fascinated by the free market, the fact that natural forces determined prices and this made society “better off”, but in reality, this is far from the case and with oil in particular, understanding how governments globally can make decisions that send shocks throughout the world has always been interesting. News from the Oil markets is certainly an interesting one. In a surprising turn of events, Saudi Arabia has announced a significant cut to oil production by 500,000 barrels per day. This decision has prompted other OPEC+ nations to follow suit, leading to a joint total production cut of 1.65 million barrels per day until the end of 2023. The countries involved include Russia (500,000), Iraq (211,000), UAE (144,000), Kuwait (128,000), Kazakhstan (78,000), Algeria (48,000), and Oman (40,000).
This decision comes amidst a whirlwind of geopolitical developments that suggest a shifting world order:
Saudi Arabia signed a deal with China to construct a $12.2 billion oil refinery and agreed to acquire a 10% stake in a Chinese oil refinery for $3.6 billion.
Saudi Arabia also joined the Shanghai Cooperation Council as a “dialogue partner.”
China and Brazil reached an agreement to trade using their currencies.
France and China completed their first Yuan-settled LNG trade.
These events appear to be interconnected and point towards a growing divide between the East and the West, as we move towards a more fragmented world order. The production cuts will likely not be well-received by central banks and governments in Western countries, where inflation continues to be a persistent issue.
Furthermore, these cuts may signal concerns about global economic growth and, consequently, oil demand. As the world moves towards renewable energy and a more sustainable future, the impact of oil production cuts on the global economy will be closely watched.
Understanding OPEC and OPEC+
OPEC, stands for the Organization of the Petroleum Exporting Countries, is an intergovernmental organization founded in 1960. It consists of 13 member countries, including Saudi Arabia, Iran, Iraq, and Venezuela, among others. OPEC’s primary objective is to coordinate and unify petroleum policies among its member countries to ensure a stable oil market, adequate supply to consumers, and fair returns for investors. OPEC+ is an informal grouping that includes OPEC members as well as non-OPEC oil-producing countries like Russia, Mexico, and Kazakhstan. Together, OPEC and OPEC+ have significant influence over the global oil market, and their decisions on production quotas can have far-reaching implications for the world economy.
Why OPEC is Significant for Investors
For investors, keeping a close eye on OPEC and its actions is crucial, as the organization’s decisions can directly impact the oil market and, by extension, the broader global economy. Fluctuations in oil prices can affect various sectors, from transportation to manufacturing, and even influence stock markets, currencies, and inflation. Investors need to be aware of OPEC’s decisions, as they can provide valuable insight into potential market trends and help inform investment strategies. For instance, production cuts like the ones recently announced can lead to a rise in oil prices, which could benefit oil-producing companies and countries, while potentially increasing costs for businesses that rely heavily on oil as an input.
How Oil Stocks May Respond to the News
As always, financial markets have volatility that is often difficult to forecast. Oil stocks are generally sensitive to OPEC announcements.
- Short-term price increase: A reduction in oil production can lead to a tightening of supply in the global market. As a result, oil prices may increase in the short term, reflecting the reduced availability of oil. When oil prices rise, oil stocks often follow suit, as higher prices can translate to increased revenues and profitability for oil companies.
- Improved market sentiment: Production cuts may also boost market sentiment surrounding oil stocks. Investors may view the cuts as a signal that oil-producing countries are committed to stabilizing the market and supporting higher prices. This positive sentiment can drive up the demand for oil stocks, further increasing their prices.
- Sector-specific impact: While oil stocks, in general, may benefit from production cuts, the impact on individual stocks can vary depending on factors such as the company’s size, location, production levels, and cost structures. Companies with lower production costs and stronger balance sheets may be better positioned to capitalize on higher oil prices and may outperform their peers.
However, it is essential to remember that various factors can influence the performance of oil stocks beyond OPEC+ decisions. To give an example, one of the largest Oil Producers, ExxonMobil shares are up over the previous 5 days.
To wrap things up, the recent oil production cuts and geopolitical developments indicate a shifting landscape in global power dynamics. As countries continue to forge new alliances and redefine their roles in the international arena, it remains crucial for investors and policymakers to stay informed and adapt to this evolving landscape. Only by understanding and embracing these changes can we navigate the complexities of the new world order and ensure a prosperous future for all.
If you found this article on oil production cuts informative and thought-provoking, you may also be interested in our previous article on the emergence of a commodity-backed currency challenging the dominance of the U.S. dollar in international trade. This new development could have significant implications for the global economy and financial markets, and it’s essential to stay informed and up-to-date on these changes. Check out our previous article for more information and analysis.