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It has become known that OPEC and allied nations agreed to prolong an oil production cut of around 10 million barrels per day through the end of July.
Oil is one of the most important natural resources that earns most countries their revenue. For oil-producing countries, crude oil forms a large part of export as well as the source of raw materials for petrochemical industries. Being an indispensable asset in powering most industries, the fluctuating price of crude oil in the international market can have a significant impact on countries’ economies which also affects industries. Now oil futures show a promising trajectory as OPEC member countries decided to shrink crude oil production from the current 10 million barrels per day throughout July.
The force of demand and supply is a major determinant of the price of crude oil. Back in April, the price of crude oil plunged down to an all-time low at less than $1 per barrel. This historic price slump was a result of the coronavirus pandemic which resulted in disruption of the global supply chain. While the ridiculously low price caused a huge panic in the market, its effects are no worse than that sparked by the coronavirus pandemic.
Oil Futures Reaction
Since the decision to cut production, the market has started reacting positively following that call. West Texas Intermediate crude for July delivery CL.1, 0.76% CLN20, 0.76%, the U.S. benchmark, was most recently up 33 cents, or 0.8%, at $39.88 a barrel, but had been trading at $38.88. On Friday, the front-month WTI contract finished for the trading period, with a weekly gain of 11.4%, according to Dow Jones Market Data. Brent oil, meanwhile, picked up around 50 cents to reach $42.79.
According to Marketwatch, the Organization of the Petroleum Exporting Countries and some of the biggest oil producers in the world, collectively known as OPEC+, concluded a videoconference meeting on Saturday, adopting measures aimed at cutting the excess production depressing prices as global aviation remains largely grounded due to the coronavirus pandemic. The curbed output represents some 10% of the world’s overall supply.
Probable Commitment Issues
It is true that the member states in OPEC agreed to this price control strategy, Reuters has quoted Helima Croft, Head global commodity strategy at RBC Capital Markets, as saying:
“While the errant producers such as Iraq and Nigeria have vowed to reach 100% conformity and compensate for prior underperformance, we still think they will likely continue to have some commitment issues over the course of the summer,”
As has played out over the years, member countries may act little about OPEC guidelines in a bid to shore up losses suffered in times past.
The big picture in this crude oil price toggle remains to maintain energy balance wherein oil producers and consumers will not suffer. Whatever the price strategy adopted, the overall impact may be ameliorated due to the presence of alternative energy sources but for industries wholly dependent on crude oil, productivity will just be in proportion to the current position of OPEC.