OPEC+ plans to return output

On 2 June 2024, OPEC+ agreed a timetable to gradually withdraw, from the autumn, part of the voluntary production cuts it had been maintaining. In the following days, the price of crude fell. The news did not bring an immediate change in the amount of oil available, but it was a clear signal of where one of the most influential groups in the energy market wanted to steer its supply.

Oil remains one of the benchmarks that most affects the costs of companies and families: transport fuel, heating, plastics and much of industrial processing depend on it, directly or indirectly. That is why a decision taken by a group of producing countries ends up showing in the bill of a workshop, a haulage company or a household.

What OPEC+ agreed

OPEC+ brings together oil-producing countries that coordinate their supply. By deciding how much crude they put on the market, they influence the price: if they produce less, oil tends to become dearer, and if they produce more, it tends to become cheaper. They do so to defend their income and, at the same time, to prevent prices falling to levels that do not suit them. It is a political and economic agreement that is adjusted as the market evolves.

The cuts being withdrawn were ‘voluntary’: each country took them on by its own decision and not through an outside obligation, which is why they can be reviewed. The market reacted quickly: the price of crude fell in the following days, although the timetable allowed room to adjust over time. For the buyer of energy, the lesson is that producers’ decisions are announced in advance and read in the market before they show up in the bill.

Supply, demand and price

More oil supply and weak Chinese demand pointed to somewhat cheaper energy. The price of crude results from both factors combined: what producers put on the market and what the large consumers, China among them, need to buy. If supply rises while demand slows, the price has fewer supports to stay high. When the opposite happens, with strong demand and restrained supply, the price tends to rise and hold.

A change in either factor can move the price quickly. A reading of economic activity, a geopolitical tension or a decision by producers is enough to alter expectations. That is why it is wise to treat the price of oil as a variable that fluctuates, and not as a stable figure on which to build a budget with no safety margin.

What to review

For industry and transport, a breather after years of very volatile costs. Somewhat cheaper energy improves the margins of those who consume it in large quantities and can ease the prices that customers end up paying. But a relief in price does not guarantee stability, and the experience of recent years advises caution before changing forecasts permanently. It is worth distinguishing between a one-off fall in price, which can reverse, and a structural change that would justify altering investment or pricing plans.

It is worth prudently reviewing supply contracts, hedges and margins, without assuming the price will hold. A hedge is an instrument that allows the price of a future purchase to be fixed in advance; it does not remove the risk but spreads it over time. Talking to the adviser about what proportion of consumption should be secured can avoid surprises, whether the price falls or rises again. Companies that already have fixed-price contracts should also check when they expire and on what terms they will be renewed.

Cheap energy is an opportunity, not a promise.

This article is general information. It is not legal, tax or investment advice, and it does not take anyone’s particular circumstances into account.