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OPEC+ deal to raise production will go a long way in strengthening global recovery

A potential decline in fuel prices will go to a great extent in helping manufacturers. With weakness in crude prices, they will be in a better position to efficiently manage their costs and reduce margin pressure to an extent.

August 02, 2021 / 12:54 PM IST
Source: Reuters

Source: Reuters


Vaibhav Agrawal, CIO at Teji Mandi

OPEC and its allies have finally given a reason to the global market to cheer. After much deliberation, the UAE and Saudi Arabia succeeded in ending their stand-off. It paved the way for the cartel to agree upon increasing oil production.

OPEC+ has agreed to increase overall supply by 40 lakh barrels a day over August-December 2021. It is a crucial decision since OPEC+ accounts for roughly 40 percent of the world's crude oil. The decision will help in easing the current supply crunch and rising prices of crude in the international market. OPEC+ has further agreed to reevaluate market conditions in December 2021 and remove the remaining production cuts by December 2022.

Relief for World Economy

The cartel has agreed to increase oil production as demand for crude is rising with the world economy opening up rapidly. Supply on the other side has failed to keep up with demand, resulting in rising oil prices.

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This has partly to do with the decision of OPEC+ to keep production in check, creating supply gut in the international market. In this regard, the decision of increasing production is crucial for the global economy.

Crucial Decision to Control Global Market

The decision will ease the supply pressure and control price volatility amid rising demand. It will also help OPEC maintain its control over the global oil market. OPEC faces two major threats currently which can challenge its supremacy in the oil market.

  1. Potential success of talks between the US and Iran to restore nuclear accord

  2. Rise in crude production from the US shale players.

So far, both these threats remain far from reality as oil production from the US has been restrained despite rising crude prices. Shale players are focusing on deleveraging and avoiding fresh capital infusion in oil projects. Negotiations between Iran, the US, and European nations to restore the nuclear accord have also hit a roadblock post the change of regime in Iran. It has added uncertainty over Iran's return to the oil market again.

However, OPEC's decision is timely as it will nullify emerging threats and keep its influence intact over the oil market.

Positive Impact on India

OPEC's decision to extend production will restore demand-supply balance in global oil markets and keep oil prices at steadier levels. Its impact can be seen immediately. Prices of Brent and WTI crude have started to stabilize around $75 a barrel. And crude prices are expected to start cooling off once increased production inventory starts hitting the market in August 2021.

The impact of steady crude prices has started to reflect in the domestic market as well. Petrol and diesel prices have steadied. Petrol prices remain above Rs 100 per litre in 17 States and Union Territories. However, they are expected to decline soon in line with the global crude prices.

A potential decline in fuel prices will go to a great extent in helping manufacturers. With weakness in crude prices, they will be in a better position to efficiently manage their costs and reduce margin pressure to an extent.

Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
Vaibhav Agrawal
first published: Aug 2, 2021 12:54 pm

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