In a new move, the OPEC Plus alliance agreed on Sunday to increase production quotas by 206,000 barrels per day for May. Despite this increase, experts consider it extremely limited in light of the significant global supply shortages of oil and the difficulties in implementing it under current conditions.
OPEC Plus stated in its announcement that the eight member countries of the alliance agreed on this increase during an online meeting. Reuters noted that this increase would be "largely on paper," due to the inability of major countries to raise production because of the U.S.-Israeli war against Iran.
Event Details
The group of eight countries includes Saudi Arabia, Russia, Iraq, the UAE, Kuwait, Kazakhstan, Algeria, and Oman, known for their voluntary production adjustments. In its statement, the group emphasized that any actions undermining energy supply security, whether attacks on infrastructure or disruptions to international maritime routes, increase market volatility and negatively impact OPEC Plus's management of global prices.
The eight countries also praised member states that managed to find alternative export routes, contributing to reducing market fluctuations. Although the U.S.-Israeli war was not explicitly mentioned, the impact of the conflict on global energy markets was evident in the decision.
Background & Context
The conflict has effectively closed the Strait of Hormuz, through which about 20% of global oil and liquefied natural gas supplies pass, since the end of February. This has led OPEC Plus countries, such as Saudi Arabia, the UAE, Kuwait, and Iraq, to cut production, as these nations were capable of significantly increasing output before the war broke out.
The Joint Ministerial Monitoring Committee of OPEC Plus expressed its concern during the meeting regarding attacks on energy facilities, noting that repairing these facilities is costly and time-consuming, affecting supplies. Several Gulf officials confirmed that it would take months to resume normal operations.
Impact & Consequences
Iran recently announced that Iraq would be exempt from any transit restrictions through the Strait of Hormuz, potentially opening the door for 3 million barrels of oil per day. However, a Baghdad official warned that this depends on shipping companies' willingness to risk entering the strait.
Estimates indicate that the largest disruption in oil supplies has led to a decline ranging from 12 million to 15 million barrels per day, equivalent to about 15% of global supplies. The price of Brent crude has risen to its highest level in four years, nearing $120 per barrel, with JPMorgan forecasting prices could exceed $150 if disruptions through the Strait of Hormuz continue.
Regional Significance
Experts assert that the increase approved by OPEC Plus will not significantly affect prices unless the Strait of Hormuz is reopened. Mamdouh Salameh points out that Gulf countries capable of raising production need some time, especially after oil facilities were affected by Iranian strikes.
On the other hand, Ziad Al-Hashimi believes that the increase in production from OPEC Plus is extremely limited and cannot impact markets amid the prevailing shock and panic. Additionally, Western sanctions on Russia hinder its ability to increase oil exports, complicating the situation further.
Ultimately, the ability of non-Gulf countries to significantly increase production remains limited, meaning that oil prices will likely remain high until solutions are found to reopen the Strait of Hormuz and restore security in the region.