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OPEC+ announces surprise oil production cut

OPEC+ announces surprise oil production cut
OPEC+ announces surprise oil production cut
(c) Michael Probst / AP /
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The OPEC+ oil cartel’s member countries surprised the markets with an unexpected production cut announcement early this week, causing a surge in crude oil prices. After initial announcements by individual countries on Sunday, OPEC+ officially informed the public on Monday in Vienna about the outcome of its virtual meeting over the weekend: The organisation’s member countries want to reduce their daily production by a total of 1.66 million barrels (1 barrel = 159 liters).

Eight countries, led by Saudi Arabia, Iraq, the United Arab Emirates and Kuwait, intend to reduce their production starting in May. In addition, Moscow announced it would maintain its already existing cut in oil production of 500,000 barrels a day through the end of the year. Moscow had announced the move in February in response to Western sanctions over the Ukraine war and then initially extended it until the end of June.

The cuts were a “precautionary measure aimed at supporting the stability of the oil market,” OPEC+ said after the meeting. Kremlin spokesman Dmitry Peskov said in Moscow that the decision served to keep prices at a certain level.

Crude Oil Prices and Oil Company Share Prices Surge

The announcement came as a surprise to the commodity and financial markets. Analysts had expected the OPEC countries to keep their oil output constant. However, fears of dropping demand, leading to further declines in oil prices, are likely to have made the cartel reconsider. OPEC+ already reduced its output by 2 million barrels per day in November.

Oil prices reacted with strong gains to the announced production cuts at the start of the week. The quotations for the reference oil types Brent from the North Sea and WTI from the USA rose by more than four dollars per barrel respectively, marking the strongest daily increase in oil prices in about a year.

Share prices of oil companies also rose sharply following the OPEC decision. Shares from oil giants Shell and BP gained more than 4 per cent on Monday. In the Euro Stoxx 50, shares of French oil company TotalEnergies were by far the biggest winners, gaining 5.9 per cent.

Oil Price Rises Rekindle Inflation Concerns on the Markets

However, energy prices are also considered to be the strongest inflation driver, and on the financial markets the announcement by OPEC+ has therefore brought inflation fears, which had recently diminished somewhat, back onto the trading floor. Previously, dropping energy prices and thus declining inflation rates had raised hopes that the central banks would slow down the pace of their interest rate hikes in the fight against high inflation. It remains to be seen whether OPEC’s move will have an impact on the interest rate policies of the major central banks.

In an initial reaction, US Federal Reserve Bank of St. Louis Chairman James Bullard said that cutting the output does not make the Fed’s job of lowering inflation any easier. However, whether the decision makes a lasting impact remains to be seen, he admitted. In addition, Bullard said he had already expected oil prices to be higher anyway.

According to experts, the OPEC’s decision could now also sour the relationship between the US and Saudi Arabia, as the announcement comes at a difficult time. The US government has released a total of about 180 million barrels of crude oil from its reserve since March to counter the skyrocketing energy prices after Russia’s invasion of Ukraine. But now the reserves have already shrunk noticeably. The US Department of Energy, in its planned replenishment program, actually wanted to buy back oil at a price well below the retail price. But the OPEC’s move now makes oil more expensive.

US Politicians Criticize Move but Remain Calm

Initial reactions from top US politicians were mixed. US President Joe Biden sees only limited impact on the US economy from the announced production cut. “It’s not going to be as bad as you think,” Biden told reporters on Monday.

While Washington doesn’t “think production cuts are advisable at this point because the market is uncertain,” as White House National Security Council spokesman John Kirby said, the situation has improved since the OPEC+ group last cut production a year ago, he said. At the time, the US government expressed considerable irritation to the production cuts by oil-producing countries. However, the market situation is different now, Kirby said.

US Secretary of the Treasury Janet Yellen called it an “unconstructive act” that would place an additional burden on consumers at a time of high inflation. In any case, the OPEC’s move is unlikely to have any effect on the 60-dollars-per-barrel price cap on Russian oil imposed by Western governments for now, according to Yellen. Countries could reconsider the level of the price cap if a change was deemed appropriate, “but I don’t see that being appropriate at this point,” she said.

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