3rd June 2024 (12 Topics)

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OPEC+ extends oil output cuts

Context

OPEC+ extended deep oil output cuts until 2025 due to tepid demand growth and rising U.S. production. Current cuts of 3.66 million bpd were extended until end of 2025. Additional cuts of 2.2 million bpd extended until September 2024. These cuts will be gradually phased out from October 2024 to September 2025.

What are OPEC and OPEC+?

OPEC Formation: Established in 1960 by Iraq, Iran, Kuwait, Saudi Arabia, and Venezuela, OPEC aimed to coordinate petroleum policies and stabilize prices.
Membership: Currently comprises 12 countries, primarily from the Middle East and Africa, collectively representing about 30% of global oil production.
- OPEC Current Members: Saudi Arabia, United Arab Emirates, Kuwait, Iraq, Iran, Algeria, Libya, Nigeria, Congo, Equatorial Guinea, Gabon, and Venezuela.
- OPEC+ Partners: Russia, Azerbaijan, Kazakhstan, Bahrain, Brunei, Malaysia, Mexico, Oman, South Sudan, and Sudan.
OPEC+: Formed at the end of 2016, OPEC+ is a coalition including 10 non-OPEC oil exporters like Russia.
Objective: Together, OPEC and OPEC+ aim to regulate global oil supply, accounting for approximately 41% of global oil production.

Influence on Global Oil Prices:

Market Share: OPEC member states' exports make up nearly 49% of global crude exports. They also possess approximately 80% of the world's proven oil reserves.
Decision Making: Regular meetings determine the amount of oil to sell on global markets. Adjusting supply in response to demand fluctuations impacts global oil prices.

Fact Box: Working of Crude Oil Market

Production: Oil is extracted from wells worldwide by both OPEC and non-OPEC countries, with production influenced by factors like technological advancements and geopolitical tensions.
Demand: Global demand for oil fluctuates due to economic growth, industrial activities, transportation needs, and seasonal variations.
Market Players:
- Producers: Countries like Saudi Arabia, Russia, the United States, and others extract and supply crude oil to the market.
- Consumers: Industries, transportation sectors, and households worldwide consume crude oil for various purposes.
Pricing Mechanism:
- Benchmark Pricing: Brent crude and West Texas Intermediate (WTI) are two widely used benchmarks for pricing crude oil.
- Supply and Demand Balance: Fluctuations in supply and demand, influenced by geopolitical events, production decisions by OPEC and non-OPEC countries, and economic factors, impact crude oil prices.
Market Regulation:
- OPEC and OPEC+: These organizations regulate oil production levels among member and partner countries to stabilize prices.
- Government Policies: National governments may implement policies affecting oil production, consumption, and trade.
Volatility: Crude oil prices can experience significant fluctuations due to supply disruptions, geopolitical tensions, economic factors, and changes in demand.
Risk Mitigation: Hedging strategies, such as futures contracts, options, and derivatives, are used by market participants to manage price risk.
Impact on Global Economy:
- Inflation and Deflation: Fluctuations in crude oil prices can impact inflation rates and consumer purchasing power.
- Economic Growth: High oil prices can dampen economic growth, while low prices may stimulate economic activity, particularly in oil-importing countries.

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OPEC+ extends oil output cuts

What are OPEC and OPEC+?

Influence on Global Oil Prices:

Fact Box: Working of Crude Oil Market

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