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OPEP

OPEC Will Increase Oil Supply Despite Falling Demand

Oil demand stands at 92 million barrels of oil per day, while supply is around 91 million, of which OPEC countries supply around 25.7 million

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The Organization of the Petroleum Exporting Countries (OPEC) along with another coalition of major oil producers led by Russia have decided to increase oil production for the next three months, following a meeting via videoconference on Thursday.

OPEC+, (as the group among OPEC member countries and other oil exporters is known), limited the supply of barrels of crude oil to 7 million barrels per day, in an effort to push the price of a barrel higher and deplete the oil surpluses accumulated from the pandemic closures.

Of the 7 million barrels of oil stopped being produced daily, OPEC’s de facto leader, Saudi Arabia took the decision to cut daily crude oil production to 1 million, or one-seventh of the total.

OPEC - Suez Canal
The Suez Canal blockade caused severe delays in the oil deliveries in Europe and Southeast Asia. (EFE)

According to statistics from Standard & Poor’s Global commodity price tracking platform Platts, oil demand stands at 92 million barrels of oil per day, while supply is around 91 million, of which OPEC countries supply around 25.7 million. Thus, any decision taken by the oil-exporting organization on the supply of crude oil will have a considerable impact on its price.

OPEC’s decision comes after massive disruption to its supply chains due to the closure of the Suez Canal

OPEC’s decision follows the more than six-day closure of the Suez Canal that affected oil supplies from the Middle East to Europe, and from the Mediterranean and Russia to Southeast Asia. The closure caused the price of a barrel of oil to rise further.

Although the Canal has now been unblocked, most oil tankers opted to wait for the Suez Canal to reopen to avoid the high costs and risks of transporting oil through the Cape of Good Hope in southern Africa.

The blockage of the Suez Canal could trigger future pressure to expand the Sumed pipeline, which would cause the supply of oil from the Persian Gulf to Europe to be expedited. (EFE)

The Suez Canal incident also becomes a major incentive for the Egyptian government to invest in and expand the capacity of the Suez-Mediterranean pipeline, also known as Sumed.

The Sumed pipeline provides an alternative to the Suez Canal for transporting oil from the Persian Gulf to Europe, as crude tankers can unload the oil at the Port of Ain Sokhna, southwest of the Canal, and quickly ship it to the Port of Sidi Kirmayr in northern Egypt for re-shipment to Europe.

Europe returns to lockdowns

The spread of new cases of coronavirus across Europe has led countries such as France, Italy and Germany to impose new quarantines, causing oil prices to fall by 4% per day.

So weak are expectations for crude oil demand in the coming months that contracts for new May orders have had to trade at a discount rate of $0.15 a barrel to June contracts.

A pesar de las cuarentenas impuestas en Europa, la OPEP espera que la demanda de petróleo se fortalezca para el segundo semestres del 2021. (EFE)
Despite the quarantines imposed in Europe, OPEC expects oil demand to strengthen by the second half of 2021. (EFE)
OPEC expects oil demand to recover by second half of 2022

With a pile of orders to be shipped due to the closure of the Suez Canal and Europe entering quarantine again, OPEC’s decision to increase oil supply is a strange one.

With the prospect of this increase in demand, OPEC+ producers determined that for the month of May they will increase their oil production by 350,000 barrels, in June it will be 350,000 barrels while for July it will grow to 450,000 barrels more.

In spite of the weak demand in the short term, as vaccination efforts around the world progress and economic activity return to normal, oil demand should also regularize. Thus, the outlook for producers will be more optimistic by mid-2021.

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