A handful of OPEC+ members announced they would cut production by a combined 1.16 million barrels a day starting in May and through the end of the year. Here’s how much oil prices are expected to rise, according to energy analysts.
The Organization of the Petroleum Exporting Countries and its allies said they decided Sunday to cut production in an effort to support oil-market stability, but that offers little comfort to consumers worried about inflation and an expected spike in fuel demand during the coming summer driving season.
What happened? OPEC and its allies, a group known as OPEC+, announced voluntary production “adjustments” on Sunday that will take effect starting in May and run through to the end of the year. “Unlike cuts in the past that were more ‘paper cuts’ to quotas with many countries already producing below quota, these are real voluntary cuts from countries producing at or above quotas,” said Rebecca Babin, senior energy trader at CIBC Private Wealth U.S., in emailed commentary. That means this will be “far more impactful than the 2 million barrels cut” announced in October 2022.
Some news reports and analysts have speculated that Saudi Arabia, a member of OPEC and among the world’s top oil producers, and other major oil producers made the surprise move to cut output because of recent comments made by U.S. Energy Secretary Jennifer Granholm. U.S. benchmark West Texas Intermediate crude oil fell below $70 a barrel to their lowest level in 15 months on March 21.“If fully delivered, the announced cut would further tighten an already fundamentally tight oil market, driving the Brent benchmark towards $100 per barrel sooner than previously expected, and would push the price to around $110 per barrel this summer,” said Jorge Leon, senior vice president at Rystad Energy.
Large short positions held by speculative traders can make for more explosive rallies as “weak-handed” players are forced to buy futures to close out losing trades. The latest spike in oil prices may “play a hand in what the Fed does next regarding its fight against inflation,” particularly if the latest jump in oil is sustained as oil at the current level “won’t be doing the inflation rate any favors,” said Tim Waterer, chief market analyst at Kohle Capital Markets.Will OPEC+ lose market share? In the past, OPEC+ has been concerned about the loss of oil-market share when it decides to make production cuts.
What are the geopolitical implications? Meanwhile, James Swanston, Middle East and North Africa economist at Capital Economics, in a note said the OPEC+ move was likely motivated by geopolitics and Saudi Arabia’s “shift away from the West.”Swanston also said the production decision has implications for the future of OPEC+ oil policy, as well as the “patience of members, particularly, the UAE.”
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