Why Oil Producers Are Driving Down Prices: OPEC+ Internal Conflicts and Trade War Impact

OPEC+ Influence on Global Oil Prices

• 🌍 OPEC+ wields significant influence over global oil prices, producing over 50% of the world's oil.
• 📈 Historically, OPEC has been effective in cutting production to raise prices, with Saudi Arabia aiming for prices near $100 a barrel.
• 👑 Saudi Arabia and Russia are the dominant powers within OPEC+, each producing around 10 million barrels daily, more than double the next member.

The Dilemma of Increasing Supply

• ⛽ Cartels like OPEC+ are fundamentally designed to drive prices higher, not lower.
• ⚖️ An economic dilemma arises when members refuse to adhere to production quotas, leading to increased supply and lower prices.
• 🤝 This situation often devolves into a prisoner's dilemma, where the cartel must decide whether to apply diplomatic pressure or collectively increase production, thereby lowering prices for everyone.

Historical Precedents and Current Standoff

• 💥 Saudi Arabia has previously launched price wars against cheating countries in 1985, 1998 (against Venezuela), and 2020 (against Russia).
• 📉 These price wars, while sometimes effective, inflict significant financial pain on Saudi Arabia itself, risking economic instability.
• 🇰🇿 The current challenge involves Kazakhstan, a non-OPEC member within the alliance, whose break-even price is lower than Saudi Arabia's, allowing it to withstand financial pressure longer.

Impact of Trade Wars on Oil Demand

• 📉 The US-China trade war has led to revised forecasts for global oil demand, with reductions from an initial 1% growth.
• 📊 Current estimates suggest oil demand growth could slow to 700,000 barrels per day, or even as low as 300,000-500,000 barrels per day if the trade war worsens.
• ⚠️ While a slowdown in demand growth is anticipated, a contraction in oil demand (similar to 2008-2009) could occur if the global economy significantly deteriors, exacerbating the effects of internal OPEC+ conflicts.