“OPEC daily basket price stood at $86.51 a barrel.”
“Al Ghais: Peak oil demand not on the horizon.”
“37th OPEC and non-OPEC Ministerial Meeting.”
Above are some of the headlines that oil traders would eye on every business day. For someone new to the oil as a commodity in day trading, one must wonder why the OPEC is a big deal in this market.
The short answer: OPEC in the oil industry is almost as important as the US Federal Reserve in the currencies industry. Find out how and why.
The Organization of the Petroleum Exporting Countries, or OPEC, is a group of oil-producing nations. Formed in 1960, its country members include Algeria, Angola, Congo, Equatorial Guinea, Gabon, Iran, Iraq, Kuwait, Libya, Nigeria, Saudi Arabia, United Arab Emirates and Venezuela.
The main goal of OPEC is to coordinate and unify petroleum policies among member countries. This helps stabilise oil markets and secure fair prices for oil producers.
OPEC+ is an expansion of OPEC that includes additional oil-producing countries, including Azerbaijan, Bahrain, Brunei, Kazakhstan, Malaysia, Mexico, Oman, Russia, South Sudan and Sudan. These non-OPEC members joined forces with OPEC to better manage oil production and prices. OPEC+ was formed in 2016 to address the oversupply of oil and the resulting drop in prices.
Source: OPEC official website
Together, OPEC and OPEC+ control a large portion of the oil supply in the world.
OPEC and OPEC+ influence the oil market mainly by adjusting their production levels. When they agree to cut production, it reduces the oil supply in the market. This often leads to higher oil prices. Conversely, increasing production can flood the market with oil, causing prices to drop.
In 1973, an OPEC member Saudi Arabia declared an oil embargo. This was in response to Western support for Israel during the Yom Kippur War. The embargo led to a severe shortage of oil and skyrocketing prices. In the US, gas prices jumped, and long lines formed at gas stations. This crisis showed the world how powerful OPEC could be in controlling oil prices.
In 2014, OPEC decided not to cut production despite a growing supply glut. This decision led to a rapid decline in oil prices, including WTI, as traders anticipated continued oversupply in the market.
WTI prices dropped from over $100 per barrel in mid-2014 to below $50 per barrel by early 2015.
In 2020, the COVID-19 pandemic caused a sharp decline in oil demand. At the same time, a price war between Russia and Saudi Arabia led to increased production. The result was a significant drop in oil prices, even turning negative for a short period.
OPEC+ then agreed to historic production cuts to stabilise the market. This action helped oil prices recover over time.
The first thing you must understand is there are two major forms of oil asset in the world.
Brent oil: Sourced from oil fields in the North Sea between the United Kingdom and Norway, Brent oil serves as a pricing benchmark for oil produced in Europe, Africa and the Middle East. Production decisions by OPEC and OPEC+ impacts the Brent oil directly as these changes hit the oil inventory level.
The West Texas Intermediate (WTI) oil: In contrast, the oil inventory of WTI is primarily extracted from oil fields in Texas, North Dakota, and Oklahoma in the United States and is traded at the Cushing, Oklahoma hub, a key storage and pricing point for US crude oil. While OPEC and OPEC+ do not directly control the production by WTI, their decisions can indirectly affect WTI as the global supply proportion is large enough.
If you are looking to do trade oil, know that supply and demand in the oil industry are mainly driven by the decisions from OPEC and OPEC+ meetings, apart from global economic data and geopolitical events.
By keeping an eye on these factors, day traders can anticipate price movements as you combine your trading strategy with technical analysis.
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