On Sunday, 2nd April, Saudi Arabia and other major oil producers announced unexpected production cuts of up to 1.15 million barrels per day from May until the end of the year, a decision that could be driving up prices globally.
An unexpected move by Saudi Arabia and other OPEC+ oil producers announced voluntary cuts in production amounting to roughly 1.15 million barrels per day. The development occurred prior to a virtual meeting of an OPEC+ ministerial panel, which includes Saudi Arabia and Russia, and which was anticipated to comply to the 2 million bpd reductions in place until the end of 2023.
The Organization of the Petroleum Exporting Countries (OPEC) and allies decided in October to restrict output by 2 million bpd beginning in November and continuing through the end of the year, that had angered Washington and driven up oil prices. The United States has claimed that the world requires lower prices to boost economic growth and prevent Russian President Vladimir Putin from generating additional money for the Ukraine war.
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This month, oil prices dropped to near $70 a barrel, the lowest in 15 months due to worries that the global banking crisis would dampen demand. Despite this, it was not anticipated that OPEC+ would take more action to assist the market, as this possibility was dismissed by sources and oil prices returned near $80.
An unexpected move
Notwithstanding price variations in recent months, there were concerns that global demand for oil will surpass supply, particularly towards the end of the year. The rise in oil prices following Sunday’s statement might put additional pressure on inflation, worsening the cost-of-living crisis and raising the possibility of a recession.
Sunday’s unanticipated voluntary cuts, which begin in May, are in addition to the October-agreed-upon reductions. Official announcements indicate that Saudi Arabia will drop output by 500,000 bpd and Iraq will lower output by 211,000 bpd. The UAE declared a production cut of 144,000 bpd, Kuwait announced a production cut of 128,000 bpd, Oman announced a production cut of 40,000 bpd, and Algeria announced a production cut of 48,000 bpd. Kazakhstan will reduce output by 78,000 barrels per day. A source from OPEC+ stated that Gabon will voluntarily reduce output by 8,000 bpd and that not all OPEC+ countries would follow suit, as some are already pumping well below agreed-upon levels due to a shortage of production capacity.
After Russia’s unilateral reductions, US officials said that the alliance between the United States and other OPEC members was deteriorating, but Sunday’s decision demonstrates that the cooperation is still robust.
The immediate price surge
The oil markets responded with a price increase. Brent prices, the worldwide benchmark, increased almost $5 to approximately $85 per barrel upon hearing the news of the reduction. Lowering oil output reduces the amount of oil available on the market, which increases prices. Although the reductions are projected to persist from May through the end of the year, the impact on oil prices is also anticipated to be prolonged.
“Overall, we think that oil price says might increase by around 10% going forward compared to what we had,” says Leon, of Rystad Energy. “That’s a significant increase,” he added. In addition, Russia announced that it will prolong its reduction of 500,000 barrels per day through the end of the year.
Monday saw a jump in the share prices of BP and Shell, with each company’s stock increasing by more than 4 percent. As a result of Russia’s invasion of Ukraine, oil prices spiked but have now returned to pre-conflict levels.
Wednesday’s oil prices were unchanged as the market weighed grim economic outlook against predictions of U.S. crude inventory decreases and OPEC’s voluntary supply curbs. Brent crude futures rose 22 cents, or 0.26 percent, to $85.16 a barrel on Wednesday. The price of West Texas Intermediate crude rose 12 cents, or 0.15 percent, to $80.83 per barrel. “Energy traders are still digesting the OPEC+ surprise production cut and any news that suggests the oil market will remain even tighter is going to send prices even higher,” said Edward Moya, an analyst at OANDA.
Saudi calls it a “precautionary measure”
The OPEC+ plan would raise the overall amount of reductions by the group to 3.66 million barrels per day (bpd), including a reduction of 2 million bpd in October, which is equivalent to approximately 3.7% of world demand. Saudi Arabia stated that the reductions were a “precautionary measure aimed at supporting the stability of the oil market.” Consistently, the kingdom disputes that production decisions are set with a particular pricing aim in mind.
Yet, oil analysts took the unexpected production cuts as a strong indication that Saudi Arabia and its close allies were establishing a floor for crude oil prices, beyond which they would take measures to support them up.
The looming tensions with Saudi Arabia
The United States and Saudi Arabia have long been allies. Recent choices about oil output and prices made by the kingdom and OPEC+ have strained the relationship.
Last year, President Biden made a high-profile trip to Saudi Arabia to request an increase in oil production in an effort to reduce high gasoline costs. He was rejected. His government issued a statement condemning the most recent cuts as unwise. In the meantime, Saudi Arabia and China are becoming closer economically (particularly through oil deals) and diplomatically.
According to analysts at RBC Capital Markets, the Kingdom of Saudi Arabia now views the United States as “just one of several partners,” while its relationship with China develops in significance. They wrote, “China is already the Kingdom’s most important trading partner and the country’s economic future is seen as residing in the East.”
