There is a significant dilemma in OPEC+'s decision to raise or lower production; there is no doubt something needs to be done for the disruption of oil supplies resulting from the continuing war with Iran, but can they even produce the product?
Currently there is a historic level of disruption in the amount of oil exported to the world. This is primarily due to the closing of the "Strait of Hormuz", which is essential to the global energy supply transporting approximately 12 to 15 million barrels of oil every single day.
The production blockage represents approximately 15% of the global oil production per day.
Saudi Arabia, Iraq, Kuwait, and the UAE are all experiencing major reductions in their ability to export oil. Oil prices are currently near $120 per barrel, with many observers predicting an additional increase over $150 shouldn't the war continue.
What does this all mean for OPEC+? They are currently discussing the possibility of making an announcement that they may increase production, however they are physically unable to deliver this increase due to numerous reasons, primarily the inability to move oil due to unsafe or closed routes and/or damage to the oil production infrastructure in these Gulf states, as well as lack of spare capacity in the Gulf States.
Currently they cannot bring it into delivery.
Why?
Export routes are unsafe and/or blocked
Infrastructure issues in Gulf region
Many members have limited spare capacity
Sanctions related to Russia from warfare
Even if production grows (on paper), this means nothing since actual oil cannot reach the global market properly and in a timely manner.
Therefore, the actual increase in suggested production will function more as a signal for the market rather than an actual supply solution.
š Market Psychology vs Reality
From OPEC+ perspective these decisions are more about:
Stabilizing market sentiment
Preventing price spikes created from panic
Signaling the world's readiness for post-war recovery
OPEC offered a small increase to production of 206,000 barrels/ per day in March; however because of these ongoing disruptions there was little or no impact to the market. (Reuters)
š Global Economic Impact
The oil shock is part of a larger macroeconomic risk for the world's economies that includes:
Rising worldwide inflation
Increased stagflation
Increased pressure on energy importing nations
Historically, this type of disruption mirrors the 1970's oil crisis and creates long-term instability due to geopolitical conflict.
For investors and analysts, the situation serves as a lesson that oil markets are not strictly driven by supply and demand, but rather by geopolitical constraints to the markets. Even if Opec+ had unlimited desire for increased production, logistics, security, infrastructure, and politics are all bottlenecks to achieving increased production.
Looking forward, investors should focus on additional developments. Events to monitor:
Reopening of the Strait of Hormuz
Length of the Iran conflict
Difference between real and forecasted OPEC+ production
Oil price movement over $120
Currently, Opec+ is in the following paradox:
They want to increase production but do not have the means to manage it
Opec+'s so-called "theoretical increase in production" is a reflection of the deeper reality that geopolitics are actually overriding market fundamentals.
Until stability returns to the region's political landscape, participants in the oil marketplace can expect both volatility and uncertainty, as the influencers on oil pricing will be global conflicts.