Surprise output cut decision by OPEC Plus countries heating up crude oil markets

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crude oil price
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Oil prices spiked to a one-month high following a surprise announcement by OPEC Plus countries to slash their production. Though prices swiftly recovered from a two-year low hit last month, the commodity is still under pressure on concerns over demand.

Last week, Saudi Arabia and its other oil-producing allies including Russia shocked global oil markets by announcing a collective production cut of more than 1.2 million barrels per day. This move is planned to start in May and extend to the end of the year. It is an apparent effort by key producing countries to increase global oil prices which have been adversely hit due to moderate demand amid worries of a global recession.

Russia and Saudi Arabia announced it would each slash production by 500,000 barrels per day and followed by Iraq, UAE, and Kuwait cutting 211,000, 144,000 and 128,000 barrels per day. There were reports that Russia is struggling to keep up production without the benefit of Western services companies that have wound down their operation since the Russia-Ukraine war. Saudi Arabian production is also running below its production quota set by OPEC countries in recent months.

The proposed cut is on top of those announced by OPEC Plus in October last year when they decided to reduce global production by 2 million barrels per day.

This move was unexpected as the producer’s allies earlier hinted that they did not intend to make changes in their production policies. Although the latest announcement made some sharp upticks in global oil prices, its impact may be limited as the global economy is going through a challenging phase.

Oil prices are currently a third below where they were immediately after the Russian invasion of Ukraine in February 2022. OPEC plus currently responding to growing fears of a recession in the wake of the failure of key banks in America and Europe and aggressive rate hikes of central banks to tame inflation.   

Despite several geopolitical factors affecting its fundamentals, global oil prices have been stuck between $83-70 per barrel since last November. Amid fears of feeble global demand, the G7-led price cap on Russian oil and Moscow’s plan for a drastic production cut had little impact on prices.

In February, the G7 countries and the European Union set a price cap on Russian oil at $60 a barrel. This move was in a view to limit Russia’s fossil fuel earnings without hindering the global supply chain of crude oil.

OPEC’s output cut is expected to put additional disruptions in the global energy supply chain, but the slowing global economy reduces the demand for oil. Mounting inventory levels in the world’s top producer, the US, may also halt major rallies in the commodity.

Since the supply-demand dynamics of crude oil remain balanced, significant changes in prices are less likely in the immediate future. Demand uncertainty from China, a possible global economic slowdown, a build-up in inventories, and a possible surge in US output continue to put downside pressure on prices. Meanwhile, the recent output cut from OPEC and a possible shortage of Russian oil may tighten the supply outlook which could offer some support to the global crude oil market.

First published in The Economic Times

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