OPEC cuts could boost oil prices in Moscow's favour

FILE - The logo of the Organization of the Petroleoum Exporting Countries (OPEC) is seen outside of OPEC's headquarters in Vienna, Austria, on March 3, 2022. - Copyright AP Photo

By Euronews with AP

Published on 03/04/2023 - 19:22

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The cuts in oil output have immediately pushed prices higher and are expected to boost gas prices, adding to strains in many countries where high fuel prices are a heavy burden.

Major oil-producing countries led by Saudi Arabia said they're going to once again cut supplies of crude. This time, the decision was a surprise and has underlined worries about where the global economy might be heading.

Russia has joined in by extending its own cuts for the rest of the year. Less oil flowing to refineries will mean higher petrol prices for drivers and could fuel inflation hitting the US and Europe. This in turn might also help Russia weather Western sanctions over its invasion of Ukraine at the expense of the US.

The decision by oil producers -- many of whom are in the Organization of the Petroleum Exporting Countries (OPEC) -- to cut production by more than 1 million barrels a day comes after prices for international benchmark crude slumped amid a slowing global economy that needs less fuel for travel and industry.

It adds to a cut of 2 million barrels per day that was announced in October. Between the two cuts, that's about 3% of the world's oil supply.

Here are key things to know about the cutbacks:

Why are oil producers cutting back?

Saudi Arabia, OPEC's dominant member, said Sunday that the move is "precautionary" to avoid a deeper slide in oil prices.

Saudi Energy Minister Abdulaziz bin Salman has consistently taken a cautious approach to future demand and has favoured being proactive in adjusting supply ahead of a possible downturn in oil needs.

That stance seemed to be borne out as oil prices fell from highs of over $120 (US dollars) per barrel last summer to $73 last month. Prices jumped after Sunday's announcement, with international benchmark Brent crude trading at about $85 on Monday, up 6%.

With fears of a US recession exacerbated by bank collapses, a lack of European economic growth and China’s rebound from COVID-19 taking longer than many expected, oil producers are wary of a sudden collapse in prices similar to the slumps seen during the pandemic and the global financial crisis in 2008-2009.

Capital markets analyst Mohammed Ali Yasin said most people had been waiting for the June 4 meeting of the OPEC+ alliance of OPEC members and allied producers, most of which are in Russia. The decision underlined the urgency felt by producers.

“It was a surprise to all, I think, watchers and the market followers,” he said. “The swiftness of the move, the timing of the move and the size of the move were all significant.”

The aim now is to ward off "a continuous slide of the oil price” to levels below $70 per barrel, which would be “very negative” for producer economies, Yasin said.

Part of the October cut of 2 million barrels per day was on paper only as some OPEC+ countries weren't able to produce their share. The new cut of 1.15 million barrels per day is distributed among countries that are hitting their quotas — so it amounts to roughly the same size cut as in October.

Governments announced the decision outside the usual OPEC+ framework. The Saudis are taking the lead with 500,000 barrels per day, with the United Arab Emirates, Kuwait, Iraq, Oman, Algeria and Kazakhstan contributing smaller cuts.

Will the production cut make inflation worse?

It certainly could. Analysts say supply and demand are relatively well balanced, which means production cuts could push prices higher in the coming months.

The refineries that turn crude into gasoline, diesel, and jet fuel are getting ready for their summer production surge to meet the annual increase in travel demand.

In the US, fuel prices are highly dependent on crude, which makes up about half of the price per gallon. According to the motor club AAA, lower oil prices have meant drivers in the US have seen the average price fall from records of over $5 per gallon in mid-2022 to $3.50 per gallon this week.

The cuts, if fully implemented, “would further tighten an already fundamentally tight oil market,” Jorge Leon, senior vice president at Rystad Energy, said in a research note. The cut could boost oil prices by around $10 per barrel and push international Brent to around $110 per barrel by this summer.

Those higher prices could fuel global inflation in a cycle that forces central banks to keep hiking interest rates, which crimp economic growth, he said.

Given the fears about the overall economy, “the market may interpret the cuts as a vote of no confidence in the recovery of oil demand and could even carry a downside price risk — but that will only be for the very short term,” Leon said.

What will this mean for Russia?

Moscow says it will extend a cut of 500,000 barrels per day through the rest of the year. It needs oil revenue to support its economy and state budget hit by wide-ranging sanctions from the US, European Union and other allies of Ukraine.

However, analysts have signalled that Russia's cut may simply be putting the best face on reduced demand for its oil. The West shunned Russian barrels even before sanctions were imposed, with Moscow managing to reroute much of its oil to India, China and Turkey.

But the Group of Seven major democracies imposed a price cap of $60 per barrel on Russian shipments, enforced by bans on Western companies that dominate shipping or insurance. Russia is selling oil at a discount, with revenue sagging at the start of this year.

What will this mean for Russia?

White House National Security Council spokesman John Kirby said, “We don’t think that production cuts are advisable at this moment given market uncertainty, and we made that clear.”

But he insisted that the oil market is in a different place from last year when prices surged following Russia’s invasion of Ukraine.

“We’re focused on prices, we’re not focused on barrels,” he told reporters Monday, adding that the US was given a heads-up before the announcement.

The White House response was milder than in October when cuts came on the eve of the US midterm elections when soaring gas prices were a major issue. President Joe Biden vowed at the time that there would be “consequences,” and Democratic lawmakers called for freezing cooperation with the Saudis.

Caroline Bain, the chief commodities economist at Capital Economics, said the cutback shows "the group's support for Russia and flies in the face of the Biden administration’s efforts to lower oil prices.”

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