OPEC+ announced a surprise cut in oil production of more than 1 million barrels a day, abandoning previous assurances that it would keep supply stable and posing a new risk to the global economy.
That’s a significant reduction for a market where – despite recent price fluctuations – supply looked tight towards the end of the year. Crude oil futures were not trading when the cut was announced on Sunday, April 2nd, but the inevitable backlash in oil prices could increase inflationary pressures around the world, forcing central banks to hold interest rates higher interest rates for longer, hampering economic growth.
Saudi Arabia led the way with a reduction of 500,000 barrels per day. Other members, including Kuwait, the United Arab Emirates and Algeria, followed suit, while Russia said the production cut it was implementing from March to June would continue until the end of 2023.
The surprise move could once again heighten tensions between the US and Saudi Arabia, a strategic regional partner whose relationship with President Joe Biden’s administration has been tense. The White House said the new cuts were ill-advised.
The initial impact of the cuts, starting next month, will add up to around 1.1 million barrels per day. As of July, due to the extent of the existing supply squeeze in Russia, there will be around 1.6 million barrels per day less oil on the market than previously expected. Russia initially decided to cut production in March in retaliation for Western sanctions imposed over the invasion of Ukraine.
Saudi Arabia said on Sunday that the cuts were a “precautionary measure aimed at supporting oil market stability”.
Relations between Saudi Arabia and the United States have been tense since last year, when White House efforts to persuade the kingdom to pump more oil failed.
Biden made a controversial trip to the region last July but returned with no production commitments. In October, when OPEC+ made a surprise cut of about 2 million barrels a day just weeks before the US midterm elections, Biden promised that there would be “consequences” for Saudi Arabia, but the US government did not follow through. .
On Sunday, the White House said OPEC+’s decision to cut oil production was not advisable under current market conditions. The Biden administration also said the US will work with producers and consumers to focus on gasoline prices for Americans.
The measure on Sunday – announced a day earlier, when the OPEC+ Committee will meet on Monday – was an unprecedented way to decide the group’s policy, which has had to adapt in recent years first to the shock of the Covid pandemic and now the war in Ukraine and the consequences of sanctions.
As of Friday, OPEC+ delegates had indicated that there was no intention to change production caps. Sunday’s decision surprised markets. All traders and analysts polled last week by Bloomberg did not anticipate any changes.
Crude oil fell to a 15-month low last month due to the turmoil caused by the banking crisis, but prices recovered as the situation showed signs of stabilizing. Brent oil, the international benchmark (see Portal de Angola 1 de Abril), closed Friday at just under $80 a barrel, 14% above the March low.
But that might not be enough for the group. In October, the last time it made a massive cut that surprised consumers, Nigeria’s Minister of State for Petroleum Resources, Timipre Sylva, said the group “wants prices around $90”.
For its part, Saudi Arabia is embarking on a massive spending spree in the trillions of dollars to transform its economy into a tourist hub and a global hub for logistics and business. While much of that spending will be driven by some sovereign wealth funds that may not directly benefit from higher oil prices, government officials have said they will use surpluses to help accelerate domestic investment.