OPEC+ Meeting On June 2: All You Need To Know
The key question is whether OPEC+ will decide to increase production, maintain current production levels or reduce production.
The Organization of the Petroleum Exporting Countries and allies are set to have an output policy meeting on June 2. The outcome of the meeting is not only important for the global oil market but can also impact Indian stocks.
What's OPEC+ & Why Does It Matter?
The countries belonging to the OPEC+ alliance represent around 40% of the global oil production. Founded in 1960, the organisation's main aim is to regulate the supply of oil in order to set the price on the world market.
The production capacity utilisation of OPEC member countries are often used as an indicator of the tightness of global oil markets, and the extent to which the organisation is exerting upward influence on prices, according to the US Energy Information Administration.
While higher oil prices generally translates to higher revenue for oil-producing countries, it can also lead to increased costs for oil-importing countries like India and higher fuel prices, which impact transportation costs and inflation.
The Current Stance
The current stance of the OPEC+ countries indicate a wish for a tighter oil supply market, which supports high oil prices.
As of May, the OPEC+ countries have implemented voluntary production cuts of 2.2 million barrels per day. The cuts were initially implemented in April and were extended for the second quarter of 2024.
In addition to prior cuts of 3.66 million bpd until the end of 2024, the latest curbs amount to a combined reduction of 5.86 million bpd from global supply. This equals approximately 5.7% of daily global demand, according to calculations by Reuters.
What's At Stake?
The key question is whether OPEC+ will decide to:
Increase production: This can cool oil prices down, potentially benefiting oil-importing countries like India, but hurting the revenue of oil producers.
Maintain current production levels: This could keep prices stable but may not be ideal for either producers or consumers in the long run.
Reduce production: This could push prices even higher, benefiting producers but putting a strain on oil-importing economies.
Street View
"There is a possibility that OPEC will push for steeper production cuts when it meets at the beginning of June amid the less optimistic demand outlook," Peter McGuire, chief executive officer of XM Australia, said in a note. "But it's hard to see an agreement beyond an extension of the existing quotas."
"The OPEC+ meeting is expected to extend current voluntary cuts," Vandana Hari, CEO of Vandana Insights, said.
She said it remains to be seen whether the OPEC+ roll over the current voluntary cuts through Q3 or the year-end. "The extension is priced in, so unless there is a surprise deviation, I don't expect crude to move much on the meeting's outcome."
Impact On Oil Prices
Despite the current stance and voluntary productions in place by OPEC+ countries, prices in 2024 have been relatively muted. While the Brent crude or oil prices have seen almost a 10% uptick since the start of January, prices since April are down almost 5%.
Prices have traded around the $85–90 per barrel range in 2024, with slight upticks in prices in February and March on the back of geopolitical tensions in west Asia and drone attacks on Russia. The market seems to be in a wait-and-see mode, anticipating the outcome of the upcoming OPEC+ meeting and its potential impact on production levels.
Oil prices have not eliminated downside risks yet. The diminishing expectations for rate cuts have been a significant drag on oil this week, but any developments in both Iran and Saudi Arabia could turn the tide around for oil, according to McGuire.
"Should Iran decide to blame Israel for the helicopter accident and retaliate, possibly with another drone attack and even a blockade of the strait of Hormuz, and if Saudi Arabia experiences an actual change in command, then the oil market could face a new reality," McGuire said.
US Inventory Data
The US plays a significant role in the global oil market. The weekly US inventory data reported by the EIA tracks stockpiles of crude oil and refined products like gasoline.
US crude inventory has been rising since January. The increase in stock piles could indicate higher demand or reduced supply.
Which Sectors Get Impacted?
Oil & Gas Companies: A higher oil price could benefit oil production companies like Oil India Ltd. and Oil & Natural Gas Corp., while squeezing margins of Indian oil marketing companies like Hindustan Petroleum Corp., Bharat Petroleum Corp. and Indian Oil Corp.
Crude-Dependent Companies: Higher crude or oil prices also impact industries that depend on fuel or crude derivatives for their raw material. This includes cement, tyre and paint makers.
Transportation Sector: Higher fuel costs could impact airlines, shipping companies and logistics firms.
Fast-Moving Consumer Goods Sector: Higher transportation costs and rising input costs could also affect the FMCG companies.
