Dating back to the early 1960s, the Organization of Petroleum Exporting Countries (OPEC) has sought to protect the interests of its production regions, primarily in South America, North Africa and the Middle East. For more than 50 years it has taken measures to do so, including dramatic embargoes and deep production cuts. Its actions continue to have a profound impact upon the global oil markets today.
Setting Precedent: The Oil Embargo Of 1973
The most famous of all OPEC actions took place in 1973, amid the angst of the Arab-Israeli Yom Kippur War. In response to Western allies’ support of Israel, OPEC placed a stiff embargo on oil exports destined for the United States, the United Kingdom, Denmark and the Netherlands.
Beginning in late October 1973, the nations of OPEC, led by Saudi Arabia, Iran and Iraq, pledged to cut oil exports by 5% every month until Israel evacuated several territories it occupied. By December, a full-blown export ban was enacted against the U.S., Israel and their allies.
The immediate impact on global crude oil was severe. By the end of 1973, oil prices had risen 200%. The fallout extended throughout 1974, with prices quadrupling from roughly $3 per barrel to $12 per barrel.
While a production cut is far different than an all-out embargo, OPEC set a powerful precedent in 1973. Oil became much more than a commodity ― it evolved into a geopolitical weapon.
Production Cuts As A Market Force
Since 1973, periodic production cuts are an OPEC strategy that the energy markets have witnessed time and again. In fact, they serve as one of the primary tools used to achieve OPEC’s stated objectives:
The mission of OPEC is to coordinate and unify the petroleum policies of its Member Countries and ensure the stabilization of oil markets in order to secure an efficient, economic and regular supply of petroleum to consumers, a steady income to producers and a fair return on capital for those investing in the petroleum industry.
In other words, the ultimate goal of OPEC is to establish a pricing floor in the global oil markets. This is done by ramping up production when oil prices are high and cutting output when they are low.
From April 2000 to June 2018, OPEC production vacillated between fewer than 22 million barrels per day (bpd) and 33 million bpd. Over this period, there were 30 official OPEC meetings; on 13 separate occasions, production cuts were initiated. Accordingly, prices of West Texas Intermediate (WTI) and North Sea Brent (Brent) crude oil were both impacted. Below are a few of the more notable production cuts and subsequent price moves for WTI and Brent:
- In January 2002, OPEC pledged to cut production by 1.5 million bpd, capping a series of four consecutive reductions. By year end 2003, WTI crude rallied 18.4% and Brent crude gained 15.2%.
- To fight depressed oil prices stemming from the Global Financial Crisis of 2008, OPEC reduced production by a total of 4.22 million bpd for calendar year 2008. A bull market in global oil ensued, with WTI prices rallying 37% and Brent spiking 34%. For the first time in history, a single barrel of crude oil cost more than $100.
- In more recent years, OPEC pledged to slash oil output twice in 2016, by a total of 1.95 million bpd. Once again, WTI and Brent posted yearly gains of 17.5% and 24.5%.
Is The Global Oil Complex Ready For A Change?
The historical relationship between OPEC cuts and oil prices is intuitive; simply reduce output and prices rally. However, this correlation may be poised for a change in the near future. The rise of shale fracking has brought previously off-limits crude oil supplies to the table. In addition, political relations between OPEC members and importers continue to evolve. Although the global oil complex has been at OPEC’s mercy for much of the past 50 years, it may not be for the next 50.
Staying on top of OPEC policy is one key to successfully trading WTI and Brent futures. For more information on the state of global oil, schedule your free 1-on-1 consultation with a Daniels Trading energy market pro today.
