OIL: OPEC V8 MEETS AS MIDDLE EAST CONFLICT BEGINS
Oil markets are influenced by a number of factors. Production targets, geopolitical risk, and inventory data all play a part and influence prices. This week, traders are watching two major issues: an output decision from OPEC+ and rising tensions in the Middle East. With global demand currently steady and US inventories recently climbing, the oil market was somewhat under pressure in recent months. But geopolitical developments have introduced uncertainty, and prices are on the rise.
- WHAT IS OPEC AND WHAT DOES THE V8 MEETING DECIDE
OPEC plays a major role in managing global oil supply. Its aim is to balance the global oil market. It consists of major oil producers, including Saudi Arabia, its de facto leader, the Gulf states, including the UAE, and African producers like Nigeria. In late 2016, Russia joined OPEC+. Together, the cartel accounts for more than 40% of global supply, meaning its decisions are likely to impact oil prices. Currently, the V8 meets at the beginning of the month to set production levels. They are “core producers” such as Saudi Arabia, Russia, the UAE, Kuwait, Iraq, and Kazakhstan. At each meeting, ministers look at inventories, demand forecasts, seasonal trends, geopolitical developments, and economic indicators. They then decide whether to increase, decrease, or keep production unchanged. The decision impacts global crude prices. The main OPEC meeting attended by top political leaders now takes place every six months.
- OPEC+ AND THE V8 OUTPUT DECISION
The OPEC+ V8 met on March 1st and decided to increase output by 206,00 barrels per day. The decision signals confidence that markets are resilient and that a modest increase might prevent prices from rising too quickly. But OPEC+ members have fallen short of output targets. It’s one thing for OPEC to state it will move on output, but whether countries can honour these agreements is another question, particularly in the current geopolitical circumstances.
- THE MIDDLE EAST FACTOR
Just before the OPEC production increase was announced, conflict risk returned. US led strikes on Iranian targets have heightened fears of retaliation or broader regional disruption. The Middle East accounts for roughly a third of global crude exports. Critically, Iran has great control over the Strait of Hormuz — a waterway route where 20% of the world’s oil supply is transported. The oil-rich region’s refineries could also be targeted in any conflict. In previous conflicts involving Iran, oil prices have risen sharply. In 2019, attacks on Saudi oil facilities triggered a 20% increase in oil prices before paring some of those gains.
- CAN OPEC DELIVER?
Another question hanging over the V8 decision is whether OPEC+ members can comply in the current circumstances. The conflict has already intensified; some members may find it politically or practically difficult to ramp up output. Endangered oil refineries, shipping insurance costs, and fears over not being able to meet domestic demand may also impact OPEC’s ability to increase output. There is also the issue of unity. OPEC members have often disagreed during periods of conflict and extreme volatility. Oil prices have sharply increased, so there could be disagreement over market share.
- POTENTIAL PRICE IMPACT: OPEC / CONFLICT
In truth, OPEC’s V8 had little impact on oil prices when markets opened on March 2nd. Traders were fully focused on the Middle East. Oil markets usually react quickly to geopolitical conflict. Prices jump on the initial shock and then settle as the situation becomes clearer. During the 1990 Gulf War, crude prices doubled in the months ahead of military action, but fell after supply routes were secured. When Russia invaded Ukraine in 2022, oil prices soared before easing as alternative flows became available.
So far, prices have already pushed to one-year highs and remain elevated. There are serious concerns, including uncertainty over how long the conflict will last. The other major worry is that energy supplies are being actively targeted by Iran and its proxies. Oil tankers have been hit, and the largest Saudi Arabian oil refinery (550,000 barrels per day) was targeted and temporarily closed. The Strait of Hormuz has been closed. Investment banks like JPMorgan have stated that if it remains shut for an extended period, oil could jump to $120. Barclays says prices could jump to between $100-150 in this scenario.
Conclusion
Oil prices have surged, and markets are concerned that the global economy could be negatively impacted. OPEC’s modest output increase isn’t likely to mitigate the current situation. If conflict continues, OPEC may be forced to call an emergency meeting to discuss a further increase in output. Until any signs of the conflict easing, oil prices are expected to remain highly volatile.