OPEC Agrees to Increase Oil Output Target From February
Unwinding the COVID-19 Production Cutback
Oil production was slashed by historic amounts in April 2020 in order to stabilize energy markets and respond to cratering demand. OPEC and non-OPEC allies have since begun unwinding those cuts, which originally amounted to around 10 million fewer barrels of oil per day. Output targets are set to increase by 400,000 barrels daily starting next month.
As energy investors monitor the ongoing situation with COVID-19 and the Omicron variant, this move from OPEC and OPEC+ is revealing. Many seem to believe Omicron will be less severe and more short-lived than previous variants of the virus, as oil prices rose by more than 50% throughout 2021. The Biden administration has been pressuring OPEC to increase oil output, and industry analysts say the White House considers $80 per barrel to be too high a price.
Omicron Not Yet Making Major Impact on Oil Markets
OPEC and its non-OPEC partners are banking on demand continuing to hold strong despite surging COVID-19 numbers as the new year begins. Industry analysts also note there are lingering concerns about oversupply throughout the first quarter of 2022. Still, oil futures increased by around 1% on news of the increased output.
It’s not clear if OPEC will continue to ramp up output following meetings in February and March, but industry analysts report there’s a high degree of optimism surrounding oil demand in general. This also matches up with the Biden administration’s call for increased supply, and the absence of any new major COVID-19 lockdowns in the US. However, Omicron is not the sole factor which could impact oil demand.
COVID-19 Is Not the Only Factor
The geopolitical landscape is also having a significant impact on the oil market. For example, investors are keeping a close watch on the ongoing border tensions between Ukraine and Russia, with the latter being the leader of the non-OPEC countries. If Russia moved troops into Ukraine, significant economic sanctions would follow, and some experts say Europe could be cut off from its natural gas supply.
In addition to tensions in Eastern Europe, energy investors are closely watching ongoing Iran nuclear negotiations. Reports indicate that US officials have been pressuring China to cut back on purchases of crude oil from Iran in hopes of restarting talks over the nuclear deal. Some say China’s purchases are keeping Iran’s economy afloat and stalling potential nuclear talks as a result.
Despite uncertainty over the next few months concerning Omicron, Ukraine-Russia relations, and Iran nuclear talks, oil production will ramp up next month. Investors will be closely watching whether this helps keep pace with demand, or exacerbate potential oversupply.
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