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Analytics, 26 October 2022

What OPEC+ Production cuts mean for global markets

OPEC and non-OPEC allies, A group of some of the world’s most influential oil producers often referred to as OPEC+, decided at their first face-to-face gathering in Vienna since 2020 to reduce production by 2 million barrels per day from November, a move that is set to influence the price of oil to $100 levels again.

This decision has motivated some investors to hedge their bets on the oil market, perhaps due to waning demand. OPEC decided to lower oil production to increase prices, which have fallen from a peak of $120 in June to about $80 now.

The US continues to oppose the move and president Biden has been vocal on the need to decrease OPEC’s control over oil prices following the OPEC+ decision. The US asked the oil producers to consider delaying the cuts by a month. The US argues that production cuts would hurt the world economy, and alleges the Saudis pressured other OPEC members into a vote.

In this article, we analyze what oil cuts entail, issues raised by the US, and what the cuts mean to traders.

OPEC+ production cuts

In a meeting held in Vienna, OPEC’s de-facto leader Saudi Arabia, through the Saudi Energy Minister Abdulaziz bin Salman, initiated a program by OPEC+ to cut oil production by 2 million barrels per day (BPD) of output, equal to 2% of global supply. He said that the move was necessary to respond to rising interest rates in the West and a weaker global economy.

The move is expected to spur a recovery in oil prices which have dropped to about $90 from $120 three months ago. The cuts are however not expected to be exactly 2 million BPD as this figure is based on existing baseline figures, which means the cuts would be less deep because OPEC+ fell about 3.6 million barrels per day short of its output target in August. The under-production happened because of Western sanctions on countries such as Russia, Venezuela, and Iran and output problems with producers such as Nigeria and Angola.

The Saudi Energy Minister Abdulaziz said the real cuts would be 1.0-1.1 million BPD. Analysts from Jefferies said they estimated the figure at 0.9 million BPD, while Goldman Sachs put it at 0.4-0.6 million BPD saying cuts would mainly come from Gulf OPEC producers such as Saudi Arabia, Iraq, the United Arab Emirates, and Kuwait.

Speaking at a news conference, OPEC Secretary-General Haitham Al Ghais defended the group’s decision to impose a deep output cut, saying OPEC+ was seeking to provide “security and stability to the energy markets.” Asked by CNBC’s Hadley Gamble whether the alliance was doing so at a price, Al Ghais replied: “Everything has a price. Energy security has a price as well.”

Rebellion from the US

The Biden administration has been under pressure in recent days to bring the cost of energy down. As mid-term elections approach, Biden faces low approval ratings due to soaring inflation, and an increase in oil prices will worsen the situation.

Reacting to the announcement of production cuts, the white house released a statement disapproving the move, stating “The President is disappointed by the shortsighted decision by OPEC+ to cut production quotas while the global economy is dealing with the continued negative impact of Putin’s invasion of Ukraine.”

The US continued to demonstrate a strained relationship with Saudi Arabia, with US officials stating that Saudi has not condemned Moscow’s actions in Ukraine as production cuts would work against the US’s plan to deprive Moscow of oil revenue.

To keep the prices of oil and oil products lower, Biden is forced to assess the possibility of continued price regulations by use of The department of energy’s strategic reserve. Biden shortly directed the release of another 10 million barrels from the Strategic Petroleum Reserve next month.

Market reaction and potential price movements

Following the announcement of production cuts on October 5th, Brent Crude rose to $93 per barrel and has consistently stayed at the $95 per barrel level. While analysts speculate the price could reach $100 yet again, high inflation rates and fears of a looming recession could keep prices below $100 for some time.

The EIA forecasts an oil price of $93/b in Q4 2022 and $95/b in 2023. The EIA’s forecast projects a supply-demand parity midway through 2023, which it predicts will last for the rest of the year.

The EIA’s report projects consumption only slightly below production for 2022, at 99.55 million barrels and 100.03 barrels, respectively. However, it shows a slight reversal of this balance in 2023. The agency forecasts consumption of 101.50 million barrels and production of 101.28 million barrels for 2023.

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