1. What exactly is OPEC?
OPEC is the organization of the oil exporting countries. There are 13 member countries, of which Saudi Arabia is the largest oil producer in the world after the US and Russia.
Russia, which is not a member, has been meeting recently. That is why we also speak of OPEC+. The fact that the second oil producer is also involved makes OPEC+ and thus today’s meeting extra important.
2. What exactly will be decided today?
In short, OPEC+ countries are discussing whether they will increase their combined oil production by 400,000 barrels per day in January. That production increase has actually already been agreed this summer.
That’s how it works: last year the demand for oil plummeted as a result of corona. After all, we started working from home en masse and we hardly got on the plane anymore. As a result, the price of oil pumped in the US even became negative for a while.
OPEC+ then decided to reduce production by 10 million barrels per day in order to increase the oil price, explains Hans van Cleef, oil expert at ABN Amro. After all, less supply means a higher price.
In the course of this year, corona rules were relaxed in many countries, increasing the demand for oil. The oil price also rose as a result. OPEC+ decided to adjust the supply of oil to the increased demand and to produce 400,000 more barrels each month, so that production would return to pre-corona levels by the end of 2022.
Meetings are held every month to see if the increase will indeed go ahead.
3. Will the production increase continue?
“It is quite difficult to decide on this, given the market conditions,” says Van Cleef. “In the past you knew for sure that global demand would increase by 1 to 1.5 percent per year due to growth of the economy and the world population. But now it is so difficult to estimate with corona.”
The main reason is the emergence of the omikron variant, explains Van Cleef. “This is already causing so much uncertainty that the oil price is already fairly low. And the International Energy Agency (IEA) even expects that in the first quarter of 2022 we will be heading for an oversupply, in other words more supply of oil than demand. reduces the need to increase production by 400,000 barrels per day.”
In addition, Saudi Arabia and Russia do not mind not increasing production or not increasing production much, thinks Van Cleef. US President Biden recently said he plans to use strategic oil reserves to lower oil prices. The Russians and the Saudis want to show that it is not he, but they determine how high the oil price is, according to Van Cleef.
Van Cleef considers it less likely to already decide to reduce oil production. With the current oil price of almost 70 dollars, both countries that produce oil and countries that import oil can live well. “Last week the oil price was still at $80 and then countries such as China, India and the US were already murmuring.”
4. What does pumping up more oil mean?
If the OPEC+ countries start pumping up more oil, the oil price will fall, Van Cleef expects. “That will certainly be the case if the oversupply continues to increase in the first quarter.”
And even if production is kept the same, the oil price will still fall, thinks Van Kleef. “The oversupply is expected to be about 2 million barrels of oil per day in the first quarter, then not letting a production increase of 400,000 barrels go through will not make a difference.”
If the omikron variant of the coronavirus continues to depress the demand for oil, for example because vaccines do not work properly, the oil price will be able to fall much further, thinks Van Cleef. “But if the decline goes quite quickly, OPEC+ can always schedule an extra meeting and decide to reduce production.”
5. What does it mean for the price at the pump?
All in all, a lower oil price will be beneficial for countries that import oil, says Van Cleef. For example, it will reduce inflation, which has risen sharply lately, and it is good for consumers if the prices of things in the store rise less quickly.
If the oil price falls, the price of petrol will also fall, according to Van Cleef. Although excise duties and VAT determine a large part of the price at the pump, the oil price naturally plays a major role in the direction of the price of petrol and diesel.