OPEC’s Dilemma: Demand Destruction Or Production Boost
The early signs of discontent and demand destruction could be forcing OPEC’s hand, but increasing production carries its own risks.
OPEC and Russia are considering raising oil production in a few weeks’ time, and while much of the focus has (rightly) been on the supply outages in Venezuela and the potential for disruptions in Iran, the prospect of demand destruction also looms large for the cartel and its partners.
Oil forecasters had been predicting a blistering oil demand growth for 2018. But lately, those bullish forecasts are not looking quite as good, precisely because oil prices had climbed to their highest level in more than three years. For instance, in May the International Energy Agency revised down its forecast for demand growth for 2018 from 1.5 million barrels per day (mb/d) to 1.4 mb/d.
But a growing list of other signs should cause OPEC some concern, and might ultimately push the disparate members of the group into agreeing on higher output.
A nationwide truckers’ strike in Brazil paralyzed the country. Truckers were outraged by the soaring cost of fuel. The expense is made worse by the fact that Brazil’s currency, the real, has declined significantly this year, doubling the pain for motorists in the country. The strike led to enormous damage to the agricultural sector, and led to shortages of a wide array of basic goods. The country’s GDP is expected to take a significant hit.
That strike was followed up by an oil workers’ strike, which forced the temporary shutdown of a series of refineries. The workers, as well as the truckers and a wide swathe of the country, are outraged about the cost of fuel, and they demanded an end to the more market-based pricing for gasoline and diesel that was introduced several years ago.
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