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OPEC+ limits global oil supply: Restrictions will lead to soaring prices

The oil industry has been shocked by a move by OPEC+ to continue limiting supply despite rising demand across the world. The move, championed by Saudi Arabia, has led to oil prices soaring which has added inflation worries for economies as they look to come out of lockdowns imposed due to the pandemic. Prices had already been surging recently due to OPEC+ restrictions and vaccines leading economic recovery helping spur demand. Russia and Kazakhstan were given exemptions and allowed to marginally boost production but this pales in comparison to the potential increase that was anticipated.

The decision by OPEC+ to continue limiting supply means that the alliance will hold production at current levels while Saudi Arabia will continue its daily production cut of 1 million barrels a day demonstrating the desire to keep the market tight and under control. The discussions had been over whether to restore 1.5 million barrels a day but the surprise move has resulted in major banks upgrading their crude oil price forecasts. With rollouts of the vaccine happening across the world, economies are strengthening and demand is rising which is going to cause even further spikes in demand and price if supply is restricted. Weak labor markets are somewhat offsetting this but going forward this is likely to be less of a factor as life returns to normal for many.

The move shows the confidence from Saudi Arabia that higher prices will still not be enough for American producers to boost supply. If all goes to plan, OEPC+ will be able to not only push up prices now but also recover market share in the future increasing its stranglehold on the global oil industry. But the alliance does have a history of underestimating US producers who continually exceed production estimates even claiming market share last year. Additionally, Asia has been at the center of demand recovery in recent months. China, in particular, has seen recent gasoline and diesel above pre-pandemic levels after the industry largely returned in the second half of 2020 and into 2021. But the country is likely to scale back imports with rising prices. India also called out it’s dismay at “artificial cuts to keep the price going up” and has stated its desire for OPEC+ to boost production. The country relies on 80% of its oil through imports making it the third largest importer globally.

South America is a region to watch in the coming years in the future of the oil. Despite the crude oil price crash caused initially by the pandemic, the region’s offshore oil boom was not deterred. Guyana, Brazil, Suriname and are all looking to significantly increase their production which in the long term could make the region the largest offshore producer globally and provide an alternative for importers. Brazil is now the 10th largest oil producer in the world and grew throughout 2020 despite difficult market conditions.