OPEC Production Cuts

What Impact will OPEC+’s Production Cuts Have on Oil Prices? 

Last Wednesday’s announcement by an alliance of twenty-three oil-producing nations of a drastic drop in oil production will reportedly have significant effects on oil prices. OPEC+, which includes Saudi Arabia, the UAE, and Russia, reached an agreement last week to reduce output by 2 million barrels per day from November 2022.

While prices for crude oil hit a high of $123.60 in June, the move to cut supplies comes as prices are now hovering around $80. Many economists are predicting that the world economy will soon begin to slow, and there is now a very real risk of sustained increases in U.S. oil prices as a result of the decision.

Investors looking to diversify their portfolio and take advantage of these price movements should do so with the assistance of a regulated and well-regarded broker such as easymarkets.

Why cut supply?

The motivation for the cut in supply is mainly the basis that the group expects there will be less demand in the coming months.

If the global economy is looking to slow down, there is generally less requirement for fuel, especially for travel, manufacturing, and other industries. It’s hoped by OPEC+ that the reduction will help maintain price stability, but the Biden White House was quick to share its dismay at the meeting’s outcome.

A statement from the White House released following the decision, conveyed President Biden’s “disappointment” at the news.

“At a time when maintaining a global supply of energy is of paramount importance, this decision will have the most negative impact on lower- and middle-income countries that are already reeling from elevated energy prices.” it read.

What happens now?

U.S. oil prices will inevitably rise due to the cuts, as much like most energy commodities, their price being dictated by supply and demand.

Globally, around 100 million barrels of oil were consumed per day in August, the most recent month on record, according to the U.S. Energy Information Administration (EIA), a loss of 2 million barrels of oil per day translates to approximately 2% from the oil market.

The EIA predicts that in 2022, the US will produce an average of 11.8 million barrels of oil per day, falling short by 500,000 barrels of the record established in 2019. However, oil prices are determined on a worldwide market, and an equivalent rise in U.S. oil production in the near term cannot make up for the OPEC+ reduction, putting a fair amount of pressure on prices.

Reuters quoted the agency as saying that the decision was already driving up prices, and could be a major contributor to sending the global economy into recession.

To alleviate the pressures in the meantime, President Biden has directed the Department of Energy to release from the Strategic Petroleum Reserve another 10 million barrels to the market in November – a risky move as the back-up supply falls to a 40-year low.

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Christophe Rude

Christophe Rude

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