OPEC's Influence Wanes as U.S. Oil Production Surges

Crude prices fell 2% as Israel acceded to international calls to hold back from a ground invasion of Gaza [c85d03ac]. The war premium on oil has been declining since Israel agreed to delay its expected ground invasion of Gaza to allow the Pentagon to place air defenses in the region. Israel is also taking into account efforts to supply humanitarian aid to civilians inside Gaza and diplomatic efforts to free more hostages held by Hamas [c85d03ac].

Oil and gas markets face volatility as Israel begins ground invasion of Gaza. The biggest risk to crude prices is escalation to other regional powers. Concerns of disruption in oil supplies raise upside risks to oil prices. Middle Eastern markets remain calm as trading begins after Israel's ground invasion of Gaza. Stock indexes in Tel Aviv, Riyadh, and Cairo show mixed movements. Investors are monitoring the conflict for potential expansion and its impact on global financial markets. The expansion of Israel’s ground operations in Gaza added more pressure to global markets as investors prepare for a busy week packed with major central bank decisions and a high-stakes announcement of US bond sales. Oil and gas companies are facing political pressure on Parliament Hill, with calls for a tax on their excess profits gaining support across party lines. Accusations of price gouging and profiting off climate chaos are also being made. The Liberal government has already introduced an excess profits tax on banks and life insurance firms, and now there are demands to apply it to the oil and gas industry. [8d867118]

The Organization of the Petroleum Exporting Countries and its allies (OPEC+) are considering additional oil production cuts as global anger grows over the escalating conflict in Gaza. The group is set to meet to discuss the possibility of extending the current production cuts beyond July. The move comes as oil prices have been rising due to increasing demand as economies recover from the Covid-19 pandemic. However, concerns over the impact of the conflict in Gaza on oil supplies have added to the uncertainty in the market. OPEC+ had previously agreed to gradually increase production from May to July, but the recent surge in violence has prompted a reevaluation of the situation. [b94f9b11]

Russian President Vladimir Putin and Saudi Crown Prince Mohammed bin Salman urged oil producers to stick to pledged supply cuts during a rare face-to-face meeting in Riyadh. The leaders highlighted the work of the OPEC+ group in enhancing the stability of global oil markets and stressed the need for all participating countries to adhere to the OPEC+ agreement. They expressed concern about the humanitarian catastrophe in Gaza. Putin's trip to Saudi Arabia and the United Arab Emirates was his third outside the former Soviet Union since the invasion of Ukraine in February 2022. [235f80aa]

The US has become the world's largest oil producer by exploiting the OPEC+ cartel's production cuts. OPEC+ has been cutting its production for 18 months to prop up oil prices, resulting in a reduction of over 5 million barrels a day from the market. However, some OPEC+ members, including Iraq, Kazakhstan, and the UAE, have been producing above their quotas. The US, despite its focus on decarbonization, is exporting oil at record levels and has become a net energy exporter. The success of US producers in boosting production has reduced OPEC's market share to about 25% from 33% five years ago. OPEC+ will face a difficult decision on whether to continue with production cuts or start relaxing quotas when they expire in June. The Saudis, who have shouldered the bulk of the production cuts, need high oil prices to balance their budget but increasing supply could push prices down. [e135b2c1]

Recent analysis indicates that OPEC's influence on global oil markets is diminishing due to the rise of U.S. oil production. The U.S. became the world's largest oil producer around 2018, driven by technological advancements such as hydraulic fracturing and horizontal drilling. While the Biden administration's policies emphasize renewable energy and energy independence, OPEC faces challenges from shifting global demand and investments moving away from fossil fuels. Energy analyst Laura M. Ahearn notes that decarbonization is redefining market players, complicating OPEC's situation. Professor Amira Al-Habshi states that OPEC's market sway is diminishing as more players enter the market, raising questions about the future effectiveness of OPEC meetings [72f47831].