Next month, members of OPEC have declared a reduction in oil production by over one million barrels per day.
Unexpectedly, OPEC member countries, such as Saudi Arabia, the UAE, Iraq, Kuwait, and Algeria, have made the decision to undertake voluntary cuts in oil production, amounting to over one million barrels per day from May until the year’s end. This move has been touted as a preemptive measure, intended to bolster stability within the oil market.
Today’s virtual meeting of 23 oil-producing countries is predicted to maintain the agreed-upon production levels. These countries had curtailed their collective output by two million barrels per day in the previous year.
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Surprising production cuts from major exporting nations have caused a surge in oil prices.
The current trading rate of Brent crude oil has surged to above $84 per barrel, marking a remarkable 5% increase from its previous level.
Following the announcement on Sunday by Saudi Arabia, Iraq, and a number of Gulf states that they were reducing their oil output by over one million barrels per day, the increase was observed.
Moreover, Russia declared that it would continue reducing its output by 500,000 barrels daily, lasting until the year’s end.
On Monday, BP and Shell, two of the biggest players in the energy industry, enjoyed a boost in share prices, both rising by more than 4%.
Following Russia’s invasion of Ukraine, oil prices surged but have since reverted to pre-conflict benchmarks.
The US has been urging manufacturers to boost production levels to bring down energy costs.
Inflation, the pace at which prices escalate, surged due to elevated energy and fuel costs over the past year, placing a strain on numerous household budgets.
The fight against inflation may face tougher times ahead, as Yael Selfin, KPMG’s chief economist, cautioned that the soaring oil prices can pose a challenge.
Despite the escalating oil prices, she affirmed that there is no assurance of an accompanying surge in household energy bills.
“The cap that households enjoy on energy prices was actually based on earlier market expectations,” she explained. “Furthermore, it’s worth noting that households tend to consume more gas than oil when it comes to energy usage.”
According to her, the brunt of the impact will be felt on transportation expenses, with a potential surge in fuel prices. Consequently, this could escalate other costs and decelerate the decline of inflation.
In response to the recent budget reductions, a representative from the US National Security Council shared their thoughts, stating, “Given the current uncertainty in the market, we believe that cutting funds is not advisable, and we have expressed our viewpoint on this matter.”
Opec+ oil producers, who collectively contribute approximately 40% of the world’s crude oil production, have taken measures to cut output.
Cuts to oil production are underway in Saudi Arabia, with the country scaling back by 500,000 barrels per day. Iraq is also reducing output by 211,000 barrels per day, while the UAE, Kuwait, Algeria, and Oman are following suit with their own reductions.
According to the official Saudi Press Agency, a representative from the Saudi energy ministry has stated that the purpose of the action is to uphold the stability of the oil market by taking precautionary measures.
According to Nathan Piper, an expert in oil analysis operating independently, Opec+ may be making a play to maintain oil prices above the $80 per barrel threshold in the short to medium term. This is particularly crucial as the global economy may suffer weakness in demand, while sanctions have had minimal impact on limiting Russian oil supplies.
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The unforeseen declaration holds considerable importance for multiple reasons.
As oil prices fluctuated in recent months, apprehensions arose that global oil demand might exceed its supply, particularly in the year’s final months. The announcement on Sunday concerning the rise in oil prices might exacerbate inflation and worsen the cost of living crisis, potentially increasing the likelihood of an impending recession.
The timing of this announcement is noteworthy, as it was made a mere day ahead of the Opec+ meeting. While members were previously leaning towards maintaining the existing production policy and refraining from initiating further cuts, this surprise announcement has turned the tables. In fact, there is even speculation that additional members of the group may choose to voluntarily reduce output, further constricting supplies.
The relationship between Opec+ and the US is poised to become more strained with the proposed development. The White House has been urging the group to augment their supply to stabilize prices and prevent Russian monetary gain.
Sunday’s declaration highlights the intimate relationship between Russia and oil-producing nations.
In addition to the two million barrels per day (bpd) reduction announced by Opec+ in October last year, further cuts have been implemented.
Despite pleas from the US and other nations for oil producers to increase their output, they still made cuts last year.
Following the announcement of production cuts by the Opec+ group in October, US President Joe Biden expressed his disappointment, referring to the decision as myopic.
Alongside Russia, Opec+ encompasses a coalition of nations that includes the Organization of Petroleum Exporting Countries (Opec).
The Russian invasion of Ukraine in February of the preceding year sparked a surge in energy prices due to concerns about oil availability. At its peak, Brent Crude reached nearly $130 per barrel.