Oil’s Not Well: Why OPEC+ has cut oil production and how it could affect countries

Its Manic Monday in the oil markets a day after OPEC+ — the group of large oil producers led by Saudi Arabia — announced a surprise cut of more than one million barrels per day.

This cut of more than one million barrels per day adds to a reduction of two million barrels a day agreed to in October last year. According to the Wall Street Journal, taken together, the output cuts amount to about three per cent of the world’s petroleum production taken off the market in seven months.

Is this just about the oil? Or is this Saudi Arabia being at odds with its one-time ally, the United States and moving one step closer towards Russia? What does the oil cut mean for the world?

We take a look at all these aspects and give you the full picture.

What is OPEC+?

Before we jump into the oil cuts and its implications, here’s a better understanding of the group of oil producers known as OPEC+.

The Organisation of the Petroleum Exporting Countries (OPEC) and its allies, together known as OPEC+, was established in 1960 by founding members Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. Today, it has 13 member states and another 11 allies major oil-producing countries, including Russia, make up OPEC+.

OPEC+ was established to coordinate the petroleum policies of its members and to provide member states with technical and economic aid. OPEC claims that its members collectively own about four-fifths of the world’s proven petroleum reserves, while they account for two-fifths of world oil production.

There are many who call OPEC+ a cartel, as it determines the supply of oil and influences the price in the world market. However, there are some who argue that it isn’t a cartel owing to each country’s sovereignty within the collective.

The logo of the Organization of the Petroleum Exporting Countries (OPEC) at its headquarters in Vienna, Austria. File image/Reuters

What did OPEC+ announce?

On Sunday, the oil-producing group announced voluntary cuts to their oil production of about 1.15 million barrels a day from May until the end of 2023. Reuters reported that the total volume of cuts amount to 3.66 million barrels per day, equal to 3.7 per cent of global demand.

Last October, the oil collective had agreed to output cuts of two million barrels per day from November until the end of the year. Saudi Arabia will lead in the cuts, followed by Iran and UAE. Russia, which is a part of the OPEC+, will also be cutting oil output by 500,000 barrels per day — a decision they made unilaterally earlier in February following the Western price caps.

Graphic: Pranay Bhardwaj

There have been persistent reports that Russia is struggling to keep up production without the benefit of Western service companies that have wound down their operations since the Russian invasion of Ukraine more than a year ago.

The announcement was unusual — it didn’t involve many members of the OPEC+. According to a Wall Street Journal report, the deal was negotiated primarily between the Saudis and Russian to get ahead of a global slowdown and raise prices to fund Saudi Arabia’s ambitious domestic projects and replenish Russia’s reserves

Commenting on the cut, a Saudi energy ministry official was quoted as telling the official Saudi Press Agency that the move was “a precautionary measure aimed at supporting the stability of the oil market.”

How has the world reacted?

The United States reacted negatively to the news, saying such a move wasn’t advisable. “We don’t think cuts are advisable at this moment given market uncertainty,” said Adrienne Watson, a spokesperson with the US National Security Council, adding, “We’re focused on prices for American consumers, not barrels, and prices have come down significantly since last year.”

Other energy experts announced their surprise at the move, saying it was not expected. Dan Pickering of Pickering Energy Partners was quoted as telling Reuters, “It’s a meaningful surprise. There was no chatter about this pre-meeting which there usually is. Probably an indication of concern around demand and what’s happening here in the U.S. around the banking crisis. It will firm prices meaningfully. We’ll have less supply in the market, a market that was not expecting it. We’ll probably get a $10 move in crude.”

Clay Seigle, director of global oil, Rapidan Energy Group, told Reuters, “OPEC+ is acting on a precautionary basis. They acted today to prevent a repeat of 2008, when OPEC cut too late to prevent oil prices from collapsing under the weight of the global financial crisis.”

The cut in output will hit the market which is tightly balanced between supply and demand. Reuters

What has been the effect of the cuts?

On Monday morning, oil prices soared almost six per cent in the Asian markets. News agency AFP reported that the West Texas Intermediate contract jumped 5.74 per cent to $80.01 a barrel, while Brent jumped 5.67 per cent to $84.42.

Matt Simpson at City Index told AFP, “Market sentiment is likely to take a knock… as higher levels of expected inflation assumes higher (for longer) interest rates. And stocks likely won’t appreciate this development, so we could be in for a rocky start to the week.”

Why the cuts though?

While Saudi Arabia said the move was to maintain stability, some experts think there’s more to it than meets the eye. Saudi Arabia is determined to lift prices to around $90 a barrel — in its efforts to deliver on Prince Mohammed’s projects, known collectively as Vision 2030.

Helima Croft, head of global commodity strategy at RBC Capital Markets told New York Times, “This is just one more indication that the Saudi leadership is moving its oil production decisions with a clear eye to their own economic self-interests.”

Others also stated that the cut was another indicator of Saudi independence from the United States, with its relationship to China increasing. China, interestingly, has been purchasing oil from Russia.There are fears that Moscow and its friend in Beijing is influencing OPEC+ — in fact, Washington had earlier accused OPEC+ of actively supporting Vladimir Putin.

What happens next is uncertain, but as Matt Simpson predicted the start of the week will be rocky.

With inputs from agencies

Read all the Latest News, Trending News, Cricket News, Bollywood News,
India News and Entertainment News here. Follow us on Facebook, Twitter and Instagram.