OPEC’s decision to raise its production ceiling by around 700,000 barrels per day (bpd) sent prices for both benchmark oil and Brent crude futures sharply higher, reaching two-year highs. The news follows a report by the International Energy Agency, which said that demand for oil would grow by 1.4 million bpd in 2016, up from 1.1 million bpd last year.
Oil prices have risen sharply in recent weeks as key producers have begun to increase output. Saudi Arabia has said it will increase production by up to one million barrels per day and Iran has said it will add 400,000 barrels. Saudi Arabia is the world’s largest producer and exporter of oil, with a market share of about 11 percent, and Iran is the fourth biggest producer, with 6 percent.
The global benchmark oil price closed above $70 a barrel for the first time in two years on Tuesday, as investors expressed optimism that the market would be able to absorb any additional production from OPEC and its allies as a result of improving demand and falling supply. Brent crude rose 93 cents, or 1.3 percent, to $70.25 a barrel, the highest level since May 2019. West Texas Intermediate futures rose $1.40, or 2.1 percent, to $67.72 a barrel. The US indicator settled at its highest level since October 2018. Members of the Organization of Petroleum Exporting Countries and its allies, a group known as OPEC+, agreed Tuesday to further ease restrictions on oil production, a sign of their confidence that demand for oil will improve and global supply shortages will be reduced. Prices began to rise after the cartel’s technical committee on Monday confirmed forecasts for a six million-barrel-a-day increase in global oil demand this year, according to people familiar with OPEC and its allies. Vaccination programs allow governments in North America and Europe to reduce restrictions on the spread of the coronavirus and resume more normal economic activity. The OPEC committee expects this to help ensure that global oil stocks, which at one point last year threatened to exceed global storage capacity, will be below the five-year average for 2015-19 by the end of July. In the US, crude oil and petroleum product inventories have fallen more than expected in recent weeks, partly due to increased demand for transportation fuels.
Brent crude oil closed at its highest level since May 2019.
Photo: Angus Mordaunt/Reuters The bullish recipe for the oil market remains unchanged: a rebound in demand, a muted response from US shale oil, and a controlled and limited supply from OPEC+, which will lead to a further drop in inventories and a further rise in oil prices, he said. Bjarne Schildrop, Chief commodity analyst at Swedish bank SEB. On Tuesday, the OPEC cartel and its allies agreed to go ahead with earlier plans to increase production by 450,000 barrels a day, starting in July. Meanwhile, Saudi Arabia will continue to roll back the unilateral production cut of one million barrels per day it imposed earlier this year. Demand growth is outpacing supply growth even with the agreed monthly OPEC production increase, a spokesman said. Anne-Louise Hittle, Vice president of the consulting firm Wood Mackenzie. The market needs the rate hike scheduled for the April meeting, she added.
Select the latest news on energy markets and companies and receive notifications by email. Nevertheless, the cartel and its allies have not yet announced their plans for after July. This is partly due to the ongoing negotiations between Iran and the Western powers on the renewal of the nuclear deal and the possible lifting of economic sanctions against Tehran. Oil prices and future OPEC+ policy could be affected if up to 1.5 million barrels per day of Iranian oil, whose supply is currently restricted by U.S. sanctions, return to the market, reports Robert McNally, former adviser to the George W. Bush administration and chairman of Rapidan Energy Group, a consulting firm. Oil prices are likely to remain stable until it is known if, when and by how much OPEC+ will raise quotas again after July, McNally said. This will partly depend on the timing and extent of Iran’s possible return to unauthorized exports, he added. The prospect of Iranian oil returning to the global market faded Monday as the International Atomic Energy Agency criticized Iran’s lack of cooperation in reporting the agency’s discovery of undeclared nuclear material at several sites in Iran as early as fall 2019. This has led to a rise in oil prices this week, according to Giovanni Staunovo, a commodities analyst at UBS Wealth Management. OPEC ministers will also keep Asia’s largest economies in mind as they consider their next steps. While new data showed that China’s manufacturing sector continued to grow in May, a spiraling coronavirus in India could hamper the recent recovery in oil demand, McNally said. -Samer Said contributed to this article. Please email David Hodari at David.Hodari@dowjones.com. Copyright ©2020 Dow Jones & Company, Inc. All rights reserved. 87990cbe856818d5eddac44c7b1cdeb8
Frequently Asked Questions
How does OPEC influence the price of oil?
OPEC, the Organization of Petroleum Exporting Countries, is a group that includes oil-producing countries that want to keep the price of oil high so that they can stay in business and earn more money. The organization is made up of at least 30 countries that produce over 50 percent of the world’s oil. The organization was formed in 1960, when the oil-producing nations of the Middle East were trying to put a stop to the high oil prices being used by the United States to support the Vietnam War. OPEC announced that it would cut production by 1.2 million barrels per day in the first half of 2017, in order to keep oil prices from falling lower than $50 a barrel. This came as a surprise, since oil prices dropped sharply in January, when the cartel decided to leave prices unchanged for its meeting in Vienna, and in February when the cartel announced that it would maintain current production cuts until the end of 2017.
What causes the demand for oil to increase?
As the demand for oil increases, OPEC is seeing more market competition, and this could result in a rise in prices of oil, further adding to the demand for oil. This can be seen with the recent increase in the price of oil. The price of oil, which has been rising for several years, is now showing signs that it could continue to rise. We’re seeing the highest oil prices in two years . That’s due to healthy inventories, a weaker dollar and rising demand.
What is something that happens if oil prices are too high?
OPEC’s decision to cut oil production has seen the price of oil soar to over $80 a barrel, which is around its highest level in two years. With the decision to cut production, the organisation said it would not replace the oil that would be removed, which is “enough to meet global demand for the foreseeable future.” The price of oil is just how much you pay for gasoline, but it also serves as a barometer for global economic activity. If the price spikes too high, it can pose a serious risk to the global economy. This is because oil is used to power everything from cars to air conditioners. If the oil prices continue to rise, it could cause problems for the global economy, since oil is the largest source of energy. So, experts have taken notice of this and have been warning oil prices to stay below a certain threshold.
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