OPEC’s Hard Choices
Oil market sentiment has shifted considerably over the last few weeks. Brent is trading above $60 per barrel, the major benchmarks are in backwardation, stocks have been falling towards the five-year average, global oil demand remains strong, financial positioning is at record length, OPEC and non-OPEC compliance has been high, the additional Nigerian and Libyan barrels have been absorbed into the market, geopolitical risks have heightened, multiple disruptions have occurred recently, and OPEC supply risks outside the core Middle East are tilted to the upside. So OPEC seems to be in the controlling seat, or is it? It is at these critical junctures that OPEC and its most important player, Saudi Arabia, face some very hard choices. While OPEC has reasserted some control of the market in the last few months, the room for manoeuvring is getting tighter and tighter. The context in which OPEC operates has been dramatically transformed. One key question that OPEC has to continuously grapple with is whether there is a ‘sweet’ oil price range that does not endanger the prospects of global oil demand while at the same time keeping a lid on oil supply growth, so the market remains in balance. This short article discusses the challenges that OPEC faces in identifying such a sweet price range.