Saudi-led OPEC is unhappy about the slight rise in oil prices. Here’s why.
Oil prices edged upward early this week amid mixed economic data from China and the extension of OPEC’s voluntary production cut. Escalating tensions in the Ukraine and Gaza wars also contributed to the price increase.
Brent futures, the global oil price benchmark, rose to $85.39 per barrel, up from June’s average of $81 per barrel. The West Texas Intermediate (WTI) benchmark rose 1.54% year-on-year to $81.30 per barrel.
Both benchmarks were up over $1 from the previous session, with analysts pointing to geopolitical tensions as the main driver of prices.
In Europe, several Ukrainian drones hit Russian oil harbors, disrupting Moscow’s crude exports to Asia. Russia holds some of the world’s largest crude reserves, with China and India being its largest clients after Moscow’s invasion of Ukraine.
In the Middle East, tensions between Iran and Israel have the potential to skyrocket oil prices. In April, some observers feared oil prices could reach $130 per barrel if Israel had retaliated against Iran’s direct attack. Luckily, the absence of meaningful escalations has so far avoided a price surge.
Moreover, the Organization of Petroleum Exporting Countries (OPEC) extended its voluntary production cut attempting to raise global prices. OPEC opted for a 1.6 million barrels per day cut, with Saudi Arabia bearing the largest share.
Lack of demand
Nevertheless, OPEC’s attempt at raising prices has so far not given the desired results. Since the last quarter of 2023, oil prices stabilized between $80-90 per barrel even after Hamas’ attack on Israel on October 7th.
One of the reasons behind the price stabilization is the US’s overproduction of crude. In 2023, the United States became the world’s largest producer of crude oil, stabilizing domestic and global prices. US President Joe Biden needs oil prices to remain stable at least until November when he will be up for reelection against Republican candidate Donald Trump.
Another crucial factor behind the current oil prices is the lack of demand from China. Beijing is the world’s largest oil importer, but domestic demand has weakened significantly amid a crippling real estate crisis and deflation.
“It is axiomatic that if China is infected with an economic virus, the whole [world] would feel the repercussions. Yesterday was the exception that proved the rule,” PVM oil broker Tamas Varga said.
Varga is referring to China’s mixed economic data: a larger-than-expected industrial output but low imports and weak consumer confidence.
As long as China keeps its oil imports stable, global prices are unlikely to increase significantly.
