It also marks the official emergence of an ‘anti-OPEC+’ that will henceforth offer a counterweight to the machinations of the oil cartel and is thus most unconventional and unprecedented. Through the release of sizeable quantities form their strategic petroleum reserves, the consuming countries have sought to create an ‘artificial looseness’ in the oil market and deliver a negative blow to oil prices, serving notice on the oil producers. It is a clear message to OPEC+ that it is not the only actor on the global oil market stage.

The full credit for this must go to US President Joe Biden, who orchestrated a supply-side coup through releases from the strategic reserves after his last ditch effort to influence OPEC+ to ease supplies so as to bring down crude prices to more reasonable levels. The US has pledged additional supply of 50 million barrels, joined by other major consumers, including China, India, Japan, South Korea and the UK. India has just announced the release of 5 million barrels, further details of which are yet to come.

The macro perspective for the orchestrated move is to check oil prices and keep the pandemic-hit GDP recovery on track, especially in the backdrop of an increasingly inflationary environment. The new alliance could act any time oil prices fire up to a level seen as unsatisfactory to spur economic growth and keep consumer purchasing power in check.

The action may not reflect in any dramatic impact on the price behaviour immediately. Biden has not provided any guidance as to when exactly the released oil will hit the market, but analysts say much of the downward impact has already been priced into the market over the past week since China announced it was ready to cooperate following the Xi-Biden summit.

India joining the coordinated release is to be seen more as a gesture of solidarity with President Biden rather than any legitimate concern over the high selling price of fuels in the country. In fact, as far India is concerned, the high fuel prices are not exactly a function of the market forces, though the government often attributes it to such factors. Despite the professed open market and de-regulation policy, the fuel prices are in the hands of the government, which manipulates the price using its arbitrary taxes and are largely unrelated to the crude prices.

The most important development to watch, however, is how the cartel will respond to the new move by the consuming countries. Analysts see two possibilities: one a closing of ranks by the cartel members to defend the artificially jacked up prices and two, the very disintegration of OPEC as the members seek to protect their market share even at the risk of producing more. It has been seen that whenever oil price falls below levels preferred by the cartel, the members start fighting, sometimes even demanding disbanding of the outfit for losing its effectiveness.

In fact, everything associated with oil production favours a lower crude price compared to whatever it was in the past. So the move to keep the prices high on the part of the cartel is that much more objectionable.

According to the annual cost of supply analysis by energy consultancy Rystad Energy, costs within the upstream sector have come down considerably in 2021, making new oil more competitive and significantly cheaper to produce. The average breakeven price for new oil projects has dropped to around $47 per barrel – down around 8% over the past year and 40% since 2014, with offshore deepwater remaining one of the least expensive sources of new supply.

According to the analysis, back in 2014, a price of close to $100 per barrel was required to produce 100 million barrels per day in 2030. By 2018, the required oil price was closer to $55 per barrel, and in 2020, it dropped to $45 per barrel. The latest estimate remains unchanged this year at $45 per barrel for 100 million bpd of production in 2030.

Just as the cartel has used its clout to keep oil prices jacked up artificially at higher levels, the new anti-OPEC grouping will have the power to tame the organisation’s greed and pursue a divide and rule policy that could even see the total disintegration of the cartel. (IPA Service)