The repercussions of OPEC's and Saudi Arabia's decisions on global oil markets

If Riyadh and other OPEC countries want higher prices, they must negotiate with China. Ahmad Abdel-Rahman investigates.

What was clear before the June 4 OPEC+ meeting is that OPEC is in trouble – whether it cuts production significantly or it does not cut it. That is why there were expectations that OPEC + would not change anything or would make only minor changes. The reason for this is that OPEC is expected to make a significant recovery in demand in the second half of the year, especially in the fourth quarter. Inventories are expected to decrease by unprecedented amounts if OPEC does not increase production in the fourth quarter. But if the global demand for oil increases, why would OPEC + cut production above the previous reduction levels?

Says Anas bin Faisal Al-Hajji, an economist who specialises in energy, OPEC+ was not expected to make any cuts at the meeting. This likelihood was magnified by the fact that some member states refused to make any additional oil cuts. Moreover, in the absence of an economic recession, there is a consensus that global demand for oil will increase in the second half of the year. The International Energy Agency, the US Energy Information Administration and OPEC agree on this. There is also a consensus that oil production in non-OPEC countries will increase, but this will be less than the increase in global demand for oil.

Previously OPEC officials said that the cuts would stop at the end of 2023, but they decided to extend the cuts until 2024. These decisions are aimed at preserving the agreement and managing the group, but they will increase production if needed. In other words, if production increases at any time between now and the end of 2024, this does not contradict the agreement or their current position, because the official position is to change production according to the market situation.

If production continues as scheduled, there will be a gap of more than 300 million barrels during the second half of the year, which means a decrease in the stock by the same amount. Since the amount is huge, and stocks have not historically decreased by this amount, Al-Hajji expects oil prices to rise and OPEC to increase production. He said: "As I mentioned earlier, the increase in production does not contradict with extending the decision to cut until the end of 2024, because its main objective is administrative and precautionary."

If there is a need to increase production, it will not be OPEC +. Rather, countries will need to make voluntary cuts. The main beneficiary of the price increase and increased demand will be Saudi Arabia.

Expectations

Extending the reduction agreement that was approved last October until the end of 2024, and extending the countries that chose the voluntary reduction, the increase in demand for oil will go hand in hand with an absence of an economic recession. Consequently, oil prices will rise.

However, China will use its commercial and strategic power to prevent prices from rising. But the price floor will be determined by Saudi Arabia. Although China will determine the oil price ceiling, which suggests that prices will fluctuate within a certain range, it will be higher than the current levels, given that Saudi Arabia and other OPEC countries want higher and achievable prices. China is critical to managing oil markets, however, since it is the world's largest importer of oil, has the largest refining capacity in the world, as well as hefty oil reserves.

The inevitable result of higher prices is the inability of the Biden administration in the US to fill the strategic stockpile before the upcoming elections, which could bring gasoline and oil prices into the presidential race.