Vestigo Volatility Score: 75%
On December 2, OPEC+, a consortium of the largest oil producing nations, agreed to increase global crude oil supply by 400,000 barrels per day in 2022. The move signals a shift in strategy that will likely have very tangible effects on the price of oil around the world in the coming months. Unlike recent efforts by US President Joe Biden, including asking the US Federal Trade Commission (FTC) to investigate oil and gas companies and releasing oil from the country’s emergency stockpile, the decision by OPEC+ will demonstrably increase global oil supply. The effort will help counter rising oil demand and subsequently lower prices. COVID-19, however, remains the unpredictable variable for any global energy strategy of the medium term, and will likely influence future OPEC+ output decisions.
Constraints to Consider
- Global dependence on oil ensures OPEC+ output decisions have tangible impact on prices
- COVID-19 variants remain an unpredictable influencer for oil supply and demand
Recent efforts by President Joe Biden to bring down oil prices will have limited impact
In early November, Biden asked the FTC to investigate potential illegal activity by oil and gas companies and alleged efforts to manipulate oil prices. Notably, Biden had requested a similar investigation four months prior. Such inquiries take time to complete, with historical precedent suggesting supply and demand issues consistently a more coherent measure of changes in oil prices. If the FTC pursues an investigation, it will likely take upwards of a year to complete, whereby the president’s efforts to influence costs will have proven inconsequential regardless of any eventual FTC findings.
Another attempt by the US administration to lower oil prices, and one widely reported by international media, involved releasing 50 million barrels of oil from a federal emergency stockpile over a period of a few months. When 50 million barrels is measured against total US oil consumption – around 2.5 days’ worth – the initiative loses much of its strategic worth. The initiative was reportedly coordinated alongside other countries globally with pledges to release their own stockpiles, further emphasizing the plan as a political enterprise.
OPEC+ currently holds the keys
Where the domestic policies of Joe Biden will have limited impact on shifting shot-term changes in global oil prices, oil output by OPEC+ has historically produced very real consequences. OPEC+, in limiting or releasing oil output, has a profound impact on the global oil supply. Saudi Arabia agreed to the increase on December 2 after pressure and a change in political posture from the US government, although Riyadh denied any political motive. As long as countries continue to heavily lean on the fossil fuel industry, governments will continue to indulge OPEC+ for their energy needs.
COVID-19 will remain the unpredictable variable for future oil price fluctuations
When the Omicron variant, a significantly mutated version of the original COVID-19 virus, hit headline news, oil markets fell. Markets are reactive. It will take weeks to investigate the real nature and risks surrounding Omicron. Nonetheless, the quantifiable effect of closing borders and reimplementing restrictions has the measured impact of reducing oil demand. This could compliment the December 2 decision by OPEC+, and further cause prices to fall through the beginning of 2022. Further variants, as well as conclusions surrounding Omicron itself, could have compounding effects on both the supply and demand of oil globally. Notably, these could continue to influence oil output decisions by OPEC+ and should therefore be tracked in tandem.
We base the percentage of our Volatility Score on the material constraints that determine the potential of a global event becoming a long-term global disruptor. We think that anything above the 75% mark should be studied with particular interest.