What is OPEC and What Role Does It Play?
As the world’s economies continue to recover from the pandemic, the OPEC+ oil alliance has recently decided to cut crude output, which may have a considerable impact on the US economy, as well as President Joe Biden’s re-election campaign. The Organization of the Petroleum Exporting Countries (OPEC) is a group of 13 oil-producing nations that coordinate policies to stabilize oil markets and ensure a regular supply of petroleum to consumers. OPEC+ includes the original members of OPEC and ten other oil-producing countries, including Russia. OPEC+ is a crucial player in the global energy markets, and its decisions can have a significant impact on the price of oil, which in turn affects various sectors of the economy, including the stock market, making it relevant to investing.
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OPEC+ Oil Output Cut Impact
This move by OPEC+ will widen the supply shortfall later this year, increasing inflation and recession risks, and reducing consumers’ cash left for other purchases. The decision will also provide Russian President Vladimir Putin with more revenue to fund his military aggression towards Ukraine. The move away from Washington’s orbit is indicative of a changing geopolitical landscape, as Saudi Arabia partners with Russia in setting oil production levels.
The Impact on the US Economy and Global Geopolitics
The US has voiced its concerns regarding OPEC+ production cuts since President Biden’s visit to Saudi Arabia, with a State Department spokesperson focusing on holding down domestic energy prices and ensuring US energy security. While US concerns remain high, competition from US shale fields as a deterrent to price hikes has decreased, and a global effort to reduce fossil-fuel usage remains a long-term goal. With these factors in mind, analysts predict oil prices will rise above $80 a barrel in the coming years, exceeding the average of $58 a barrel between 2015 and 2021.
Crude market volatility impacts global economy
The volatility in crude markets over the last 18 months has been starkly evident, with prices hitting around $120 a barrel in June 2022, as Russia’s invasion of Ukraine loomed, before dropping to around $75 in December due to concerns about a recession in Europe, rapidly rising interest rates in the US, and China’s Covid restrictions. Demand started to pick up in early 2023, largely due to reopening in China, the world’s largest importer. Last month’s banking turmoil halted the rally, but the price had resumed its rise even before the recent OPEC+ output cut.
Higher oil prices could hinder US inflation control
For the global economy, a lower oil supply and higher prices are bad news. Major exporters are the big winners, but for importers, like most European countries, more expensive energy is a double blow, slowing growth and raising inflation. The US, as a major oil producer, benefits from higher oil prices. However, these benefits are not shared equally, unlike the pain of higher pump prices. Bloomberg Economics’ SHOK model predicts that for every $5 increase in oil prices, US inflation will rise by 0.2 percentage points. At a time when the Federal Reserve is struggling to bring prices under control, this is not a welcome prediction.
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Geopolitical Shifts Impacting the Stock Market
Three key reasons why more such shocks may be in store are the geopolitical shift, the maturing of shale, and the Saudi spending splurge. For decades, the US-Saudi “oil for security” pact has been a pillar of the energy market. However, the pact is no longer what it once was. The murder of Washington Post columnist and Saudi dissident Jamal Khashoggi in 2018 and the threats made by Joe Biden in 2019 to restrict weapons sales to Saudi Arabia following his election as president are indicative of the relationship breakdown.
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Stocks of oil and gas companies surge after OPEC+ cut
The OPEC+ production cuts have not only affected the oil market but have also had a ripple effect on the stock market. For example, stocks of oil and gas companies have been on the rise since the OPEC+ decision, with companies such as ExxonMobil, Chevron, and BP recording gains in their stock prices.
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