Saudi Arabia and other major oil-producing countries in the Middle East recently announced surprise oil production cuts totaling over one million barrels per day from May until the end of the year.[0] The move aims to stabilize oil prices that recently hit 15-month lows due to fuel demand concerns created by the banking crisis.[1] Russia also recently announced that it would lower its oil production by 500,000 barrels per day until the end of this year, bringing the combined voluntary cuts of OPEC+ members to over 1.6 million barrels per day.[2]
Oil prices surged 8% following OPEC+’s unexpected declaration of a 1.16 million barrels per day reduction in production.[3] However, the White House has spoken out against OPEC’s decision, stating that it believes “cuts are not advisable at this moment given market uncertainty.”[4] The move comes as demand for oil looks set to surge, a dynamic that sets the stage for tight supply well into the future.
The production cuts are expected to increase gas prices in the US, with GasBuddy Petroleum analysis Patrick De Haan warning that American drivers could see a gas price spike within “the next few days.”[5] On Twitter, DeHann said he expected the slowdown to cause oil prices to rise $3 to $6 a barrel, with the increase at the pump limited to around 5 to 15 cents a gallon.[6]
Despite the decrease in breakeven prices for numerous oil-producing nations, those in the OPEC+ group are considering the bleak possibility of a worldwide economic downturn and modifying their production levels in response to the market’s supply and demand dynamics.[7] Another consequence of the OPEC+ cuts is that the oil market should rebalance more quickly, leading to a faster rise in oil prices.[8]
Goldman Sachs has also raised its Brent forecast after the OPEC+ announcement — from $90 to $95 a barrel by the end of the year.[2] According to the bank’s projection, Brent is expected to reach $100 by the conclusion of 2024.[9] However, Citigroup’s global head of commodities research, Ed Morse, believes that oil prices are not going anywhere near $100 per barrel despite the latest production cuts announced by members of the OPEC+ group, as US supply growth and uncertainty in Chinese demand growth path will keep the market fairly balanced.[2]
Overall, the unexpected production cuts from OPEC+ are a pre-emptive move ahead of a likely economic slowdown and possible recession in the US later this year. OPEC+ said its decision was aimed at ensuring stability in the oil market, by which it means putting a floor under oil prices of about $80 a barrel. Nonetheless, reducing production is a risky move, banking on the assumption that increased demand from China, which is gradually bouncing back from its stringent lockdown, will balance out the decline in demand in western countries.[10] Despite strong opposition from Joe Biden’s administration, the fact that the Saudis proceeded with their voluntary production cut is indicative of the cooling of relations between Washington and Riyadh.[10]
0. “Major oil producers cutting production” KTTC, 4 Apr. 2023, https://www.kttc.com/2023/04/04/major-oil-producers-cutting-production/
1. “Stocks Climb Before the Open as Investors Weigh Economic Outlook, U.S. JOLTs Report in Focus” Barchart, 4 Apr. 2023, https://www.barchart.com/story/news/15687735/stocks-climb-before-the-open-as-investors-weigh-economic-outlook-u-s-jolts-report-in-focus
2. “Oil prices surge 5% after OPEC’s surprise output cut; analysts warn of $100 per barrel” NBC News, 3 Apr. 2023, https://www.nbcnews.com/news/us-news/oil-prices-surge-5-opecs-surprise-output-cut-analysts-warn-100-barrel-rcna77865
3. “OPEC announces plans to cut oil production” WRAL News, 3 Apr. 2023, https://www.wral.com/story/opec-announces-plans-to-cut-oil-production/20794748
4. “What the OPEC cuts mean for Putin and Russia” CNN, 4 Apr. 2023, https://www.cnn.com/2023/04/04/investing/premarket-stocks-trading/index.html
5. “Prepare for gas price bumps at the pump in ‘the next few days,’ GasBuddy analyst warns” Fox Business, 4 Apr. 2023, https://www.foxbusiness.com/markets/prepare-gas-price-bumps-pump-next-few-days-gasbuddy-analyst-warns
6. “Gas experts expect rise in price at the pump after oil production cuts” WRGB, 5 Apr. 2023, https://cbs6albany.com/news/local/gas-experts-expect-rise-in-price-at-the-pump-after-oil-production-cuts
7. “Oil Markets Are Misinterpreting The OPEC Cut” OilPrice.com, 5 Apr. 2023, https://oilprice.com/Energy/Crude-Oil/Oil-Markets-Are-Misinterpreting-The-OPEC-Cut.html
8. “OPEC+ throws tanker shipping a curveball, shaking confidence” FreightWaves, 4 Apr. 2023, https://www.freightwaves.com/news/opec-throws-tanker-shipping-a-curveball-shaking-confidence
9. “US stocks lower as FTSE closes in the red amid oil price concerns” Yahoo News, 4 Apr. 2023, https://news.yahoo.com/ftse-100-european-stocks-oil-price-080759320.html
10. “Why are oil prices rising and what does it mean for inflation?” The Guardian, 3 Apr. 2023, https://www.theguardian.com/business/2023/apr/03/why-are-oil-prices-rising-opec