The roles of the US Federal Reserve and OPEC share parallels in navigating economic terrain akin to maneuvering a vehicle on a winding mountain road, with limited visibility through a rear-view mirror and control solely over the brake, which operates with a delay of at least a month. Adding to OPEC’s challenges is its status as a coalition with several stakeholders, not always aligned on the intended direction.
Yet, despite hurdles, OPEC+ finds itself back on track. Though delayed, the group’s supply cuts have begun to yield desired results, as evidenced by Brent prices crossing the $90 per barrel mark for the first time since October following last Wednesday’s meeting reaffirming production cuts until at least June’s end.
Expectations last year of a tightened market and potential $100 per barrel prices were dashed by a surge in US oil production colliding with economic uncertainties, causing prices to plummet by almost $20 per barrel by mid-December before a hesitant rebound.
While adherence to OPEC+ targets remains robust, overproduction persists, primarily led by Iraq exceeding its allocation by about 300,000 barrels per day in March, primarily due to increased output in the Kurdistan region. Kazakhstan and, to a lesser extent, Gabon have also exceeded targets, while Nigeria, though below its quota, has ramped up production compared to last year.
Efforts to address overproduction entail calls for plans to compensate for excesses. However, full offsetting by Iraq appears improbable, despite potential production cuts. Meanwhile, countries like Iran, Libya, and Venezuela, exempt from targets, have boosted output compared to last year.
After a strong 2023, US output dipped in January due to winter storms, with a projected modest increase of 260,000 barrels per day for the year, according to the Energy Information Administration, with more substantial growth anticipated in the following year.
Divergent demand forecasts between OPEC and the International Energy Agency have been notable, with OPEC maintaining a bullish outlook compared to the IEA’s more conservative estimates. Geopolitical tensions, while dramatic, have yet to significantly sway prices, but tighter enforcement of US sanctions on Russian shipping and potential reinstatement on Venezuela could alter the landscape.
Looking ahead, OPEC+ faces pivotal decisions. It could maintain current policy until prices breach $100 per barrel, potentially risking increased US output and inflationary pressures. Alternatively, buoyed by robust demand projections, it could gradually ease production cuts, particularly among members with spare capacity like the UAE and Saudi Arabia.
As the oil market emerges from the tumult of the pandemic and geopolitical upheavals, OPEC+ confronts the imperative of steering toward a smoother trajectory amidst evolving economic and geopolitical dynamics.