What is OPEC and How it Influences Oil Prices?

OPEC: A Brief History 

The Organization of the Petroleum Exporting Countries was founded in 1960 by five founder members; Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. Other countries including Libya, the United Arab Emirates and Algeria joined later. The organization has a total of 13 member countries as of February 2022. OPEC headquarters were in Geneva, Switzerland, during the first five years following its establishment before moving to Vienna, Austria, on September 1, 1965.

The main objective of the Organization of the Petroleum Exporting Countries is to coordinate petroleum policies among member countries in order to avoid sharp price fluctuations, ensure stable prices for oil-producing and purchasing countries, regulate production and secure fair returns on oil investments. 

The cartel is committed to acting and setting policies that ensure stabilized oil prices in a way that keeps the interests of member countries while warranting uninterrupted oil supply to other nations. 

What is OPEC+？

OPEC has been cooperating with nonmember countries for the past few years to control production levels and support oil prices. Non-OPEC members include Russia, Kazakhstan and Mexico. This was called OPEC+. Despite recent collaboration, Russia announced it has no plans to join the oil cartel. However, discussions about long-term partnerships have been held. Russia is the world‘s third-largest oil exporter following the United States and Saudi Arabia. Some nonmember countries also volunteer to adjust their oil production with OPEC’s levels to maintain common interests.

How OPEC Influences Oil Prices 

Historically, crude oil prices have risen when OPEC applies supply reductions. Collectively, OPEC member countries produce around 40% of the global crude oil supply and the cartel‘s oil exports represent about 60% of the total oil traded worldwide. Because of its elevated market share, OPEC’s decisions and policies do influence international crude oil prices. Production changes in crude oil production frequently affect oil prices especially for the top producers like Saudi Arabia.

Oil prices are broadly determined by the relationship between supply and demand and are driven by three main forces:

• Supply: Production levels are the main price driver when it comes to oil. This explains why OPEC+ decided to curb supply to support prices. 

• Demand: Global demand trends directly influence price movements. The United States, China and Europe dominate the global demand consuming around 45 million crude oil barrels per day. 

• Price Speculations: Oil prices are based on the futures market, meaning that market speculation about potential events and trends could have a direct impact on oil prices. 

The value of the US Dollar has a direct impact on oil prices. Since oil is priced by the US dollar, prices are inversely related to the value of the USD. So, when the value of the dollar rises, prices fall, and vice versa. On the other hand, some currencies are impacted directly by oil price changes. Read more on Understanding Currency and Commodity Correlations

Unexpected events can also have a huge impact on prices. In 2020, when economies got stuck in lockdown in the wake of pandemic outbreak oil prices began to fall dramatically. Oil consumption averaged 94.4 mpd in Q1 2020 down 5.6 mbp from the prior year. The sharp drop in global demand was even worsened by the supply glut. Producers increased output to keep their market share. 

By April, crude oil crashed into the negative territory for the first time ever. WTI barrel traded at -$37. Shortly after, prices managed to rebound gradually as the global economy reopened and demand began to rise. Meanwhile, production cuts help to restore the balance between supply and demand. 

Turbulences in oil-producing countries dramatically increase oil prices as traders worry the crisis will limit oil supply, which may lead to higher demand and price levels.