What’s Going On Here?OPEC+ – the group of major oil-producing countries and their allies – agreed late last week to add 500,000 barrels to their collective daily output, starting in January. What Does This Mean?First, some background: earlier this year – after a price war in which Saudi Arabia and Russia ramped up oil production and pushed down its price – OPEC+ agreed to lower its output for a while. There wasn’t much need for the slippery elixir at the height of the pandemic, after all – not with the global economy having all but ground to a halt.
As part of the agreement, OPEC+ said it’d start boosting oil production by 2 million barrels a day in stages – first in the summer, and next in January. But since the global economy still isn’t firing on all cylinders, OPEC’s settled on upping production by a quarter of that. Of course, no increase at all might’ve been even better… Why Should I Care?For markets: With friends like these…
The price of an oil future hit its highest level in nine months last week, partly because less fresh oil than expected should raise the value of what’s left. That’s especially true because demand for the black ambrosia is booming in Asia, given that growth is getting back to its winning ways – particularly in China. And since OPEC+ reached this compromise without too much fuss, analysts are more optimistic than normal that the countries who usually don’t stick to these kinds of agreements will do this time around.
The bigger picture: Betting on a brighter tomorrow.
By upping oil production, OPEC+ is essentially betting that the worst of the dip in global economic activity is in the rear-view mirror, and that growth – and with it demand for oil – will pick up next year. If it’s right, oil-dependent industries like construction and travel will start to recover – boosting oil’s price, balancing OPEC+ nations’ budgets, and restoring oil companies’ profits. | 