Reduce production to increase the cost of black gold. This is what the OPEC + countries are suspected of doing, which have announced drastic cuts in their oil production. On Monday, the day after this announcement, oil prices jumped. In total, eight of the 23 members of the Organization of the Petroleum Exporting Countries (OPEC) and its partners are concerned, with Saudi Arabia in first place.
The alliance took note on Monday of these “voluntary adjustments” in production, following a long-planned technical meeting by videoconference (JMMC). In unison with its members, it assured that it was “a precautionary measure aimed at supporting the stability of the oil market”. But for analysts, it is above all a question of reaping additional “income”, commented in a note Jorge Leon, of Rystad Energy. These cuts show that OPEC + will do everything to “defend a floor price well above 80 dollars a barrel”, he says, without worrying about criticism from the United States and other consumer countries, worried about galloping inflation.
Crude prices fell in March to their lowest in more than a year, “an unacceptable level for members of OPEC +”, explains to AFP Ibrahim al-Ghitani, oil market expert, based in the Emirates. They had suffered the repercussions of the banking crisis in the United States, which drove investors away from commodities and other more volatile risky assets.
Biggest increase since the war in Ukraine
After this concerted action by the big producers of black gold, the market reaction was immediate: the two global benchmarks took off by around 8% at the start of the session, returning to their level before the turmoil in the banking sector. On both sides of the Atlantic, prices were on track to post their biggest daily increases since the surges of the first weeks of the Russian invasion of Ukraine in March 2022.
Iraq, Algeria, Saudi Arabia, the United Arab Emirates, Oman, Kazakhstan, Kuwait and Gabon will therefore make significant reductions from next month, until the end of 2023. They range from 500,000 barrels per day (bpd) for Riyadh to 8,000 bpd for Libreville. Moscow, for its part, has extended its 500,000 bpd reduction measure until the end of 2023.
In total, the volume left underground will be “about 1.66 million barrels daily”, said OPEC +. “Most of the cuts will be made by countries producing at or above quotas” set, implying “real supply cuts” and market tightening, DNB analysts pointed out. Other countries could also “announce their own cuts if they deem it (…) necessary”, according to Deputy Prime Minister in charge of Energy Alexandre Novak, interviewed by Russian television Rossiya 24.
Growing demand
And unlike similar measures taken by OPEC + in the face of the pandemic or fears of recession, this time global demand for oil is increasing: China, the country greediest in black gold, reopens its economy after lifting health restrictions .
This announcement comes on top of what had already been decided in October, namely a drop in volume of two million bpd. This was then the largest reduction since the emergence of Covid-19. This is a new setback for Washington, which pleads for an opening of the black gold taps in order to contain prices, estimates Caroline Bain, of Capital Economics.
From a geopolitical point of view, these reductions also demonstrate “the group’s support for Russia”, which will thus benefit from better prices to offset the impact of Western sanctions. The Kremlin on Monday defended a decision taken “in the interest” of the world market, to maintain prices “at the right level”, according to the spokesman for the Russian presidency, Dmitry Peskov. “Whether other countries are happy or not is their business,” he told reporters.