Who is actually setting the price of oil now, is it the US or is it the OPEC?

In recent weeks, there were diverse pressures on oil. Tensions between Russia and Ukraine made oil pricier while a possible Iran deal was a relief. Over the last few years, the key influencers have been changing and shifting. For a long time, it was the OPEC that was the swing producer deciding the oil prices. Since 2014, the US with its shale supplies, assumed a lot of importance. But what is the situation now and how is really setting oil prices?

One thing is apparent that the US influence is gradually diminishing. Unlike the period between 2014 and 2018, the US is not the key driver any longer. The US shale boom was largely driven by easy credit, which has ceased with bond yields shooting up. Most potential shale sources have been exploited to the hilt and therefore the US control on supplies is not what is used to be. In a way, the alliance between Russia and OPEC, calls the shots now.

Why has OPEC become the key? OPEC’s share of output in the overall global oil output may have fallen to below 40%, but that is just part of the story. The reality is that the OPEC still accounts for more than 60% of oil exports. That is unlike the US where most of the current oil output is consumed internally with limited interaction in the export market. Above all, OPEC controls more than 80% of the world oil reserves between KSA and Venezuela.

The fact is not just about OPEC but about OPEC+. Supply decisions are taken by the OPEC now in tandem with key producers like Russia, Mexico and Kazakhstan. These are not part of the OPEC but are part of OPEC+. Together they control more than 56% of world output and this has ensured that the OPEC+ alliance has substantially higher bargaining power compared to just the OPEC. It is the OPEC+ that is calling the shots on oil prices.

Another impact factor is that the COVID demand compression story is now over. Today, the global oil market is under-supplied by about 2-3 million barrels per day. Demand disruption caused by COVID is history and that is unlikely to happen any time with the same magnitude in the near future. It is therefore the producers who are again setting the oil price for now. It is not demand, it is not COVID and it is not the US. Oil is now about OPEC+ group.