OPEC+ meeting. What does a trader need to know?

OPEC+ meeting. What does a trader need to know?

The Organization of Petroleum Exporting Countries (OPEC) is an international organization composed of oil exporting countries whose main purpose is to control production quotas for raw materials to ensure price stabilization in international oil markets. Also, the purpose of the organization is to respect the interests of the producing countries and the need to ensure a stable income for the producing countries; an efficient, economic, and regular supply of oil to the consuming countries; and a fair return on capital for those who invest in the oil industry. Another goal of the cartel is to reduce the control of the oil industry by large multinational corporations.

But there is an alternative view. The OPEC group can be defined as a coalition of independent parties formed to promote common interests by controlling the market or manipulating oil prices. And the way the countries have behaved in the last two years confirms this hypothesis.

The original OPEC group was formed in 1960, when Iran, Iraq, Saudi Arabia, Kuwait, and Venezuela met and agreed to nationalize their oil production and agree on production plans. OPEC now includes 13 oil-producing countries: Algeria, Angola, Congo, Equatorial Guinea, Gabon, Iran, Iraq, Kuwait, Libya, Nigeria, Saudi Arabia, UAE, and Venezuela. The 13 current members account for 40% of the world's annual oil production and about 80% of the world's proven reserves.

In 2016 in Algeria, OPEC countries and other major oil producers, for the first time, formed the OPEC+ alliance, which additionally included such countries as Azerbaijan, Bahrain, Brunei, Kazakhstan, Malaysia, Mexico, Oman, Russia, South Sudan, and Sudan. OPEC+ increased its share of market control to 55% and 90%, respectively. OPEC+ countries meet monthly, usually on the first Wednesday and Thursday of the month.

The main oil importers of OPEC+ countries are the European Union, China, the United States, India, and Japan.

Why is it important for traders to follow OPEC+ meetings?

Each year, the oil-producing countries create a quota plan of how much oil each country should produce. Then, the OPEC+ countries meet every month to adjust the initial plan, as supply and demand are constantly changing. Pandemics, war, pipeline accidents, supply chain problems, inventory levels, the release of strategic reserves, terrorist attacks on oil infrastructure facilities, sanctions on major oil exporters, and the summer/winter season are all reasons that affect supply and demand in the oil market.

The main challenge for an investor is determining if the current oil production level is in line with demand. If production is in line with production levels, oil prices will be stable for a long time. When the pandemic Covid-19 began and many countries closed for lockdown, the number of oil consumers fell sharply when production levels remained high. As a result, oil had nowhere to distribute, and even tankers were used as floating storage. The oil demand fell sharply, and the offer was too much. Oil prices fell to zero and dropped below zero for the first time in history.

Then oil producers sharply reduced production. Production cuts were agreed upon at the OPEC+ meeting. Supply began to fall sharply, so oil prices began to stabilize. Production was kept low until demand for oil products began to recover. Eventually, oil producers kept production low until demand again exceeded supply. So oil prices began to rise again.

Thus, understanding what the market demand for oil is now coupled with OPEC+ production levels allows investors to understand the imbalance in the market. The supply/demand imbalance forms a medium-term trend in the oil market.

Recently, OPEC+ influence on the market has been widely criticized. Since its member countries hold vast crude oil reserves, the organization has considerable influence in these markets. As a cartel, OPEC+ members have a strong incentive to keep oil prices as high as possible while maintaining their global market share.

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by JustMarkets, 2022.09.07