The world’s largest producers abruptly reduced their output, sending the price of oil surging to close to $86 per barrel. This move is likely to exacerbate existing tensions with the US as western governments struggle to control inflation, Entrepreneurng report.
The Opec+ group of nations, which includes major producers Saudi Arabia, Iraq, and Russia, announced that they would reduce output by nearly 1 million barrels per day, or roughly 3.7% of the world’s consumption.
Moreover, 2 million barrels per day will continue to be cut through the end of 2023, as was originally agreed upon in November.
Russia made plans to prolong its current 500,000 barrel per day output cut till the end of the year at the same time.
The international benchmark for oil prices rose more than 7% to $86 a barrel on Monday morning as a result of the decision, which immediately caused a jump in Brent crude futures contracts for May.
The top oil producers in the UK saw a rise in share values as a result of rising oil prices. The two largest gainers on the FTSE 100 on Monday were BP and Shell, which both gained over 5%. The two biggest gainers on the FTSE 250 were Harbour Energy and Tullow Oil, up 8% and 6%, respectively.
While Opec+ officials claimed that the action was taken to ensure the stability of market prices, several analysts claimed that members were aiming for bigger profits.
Officially, the cartel seeks price stability in the oil markets, according to Swissquote Bank senior analyst Ipek Ozkardeskaya. In actuality, though, all they want are greater costs.
The International Energy Agency stated that the cutbacks proposed by Opec+ ran the risk of worsening a tense market, and Capital Economics’ head commodities economist Caroline Bain stated that it was difficult to believe there was not “some geopolitical posturing buried in these voluntary cuts.”
It shows the group’s backing for Russia and runs counter to the Biden administration’s efforts to bring down oil prices, according to Bain. “The US just declared that it will not be replenishing its strategic reserve this year, hence reducing the amount of extra petroleum demand. These most recent cuts are probably a reaction to the US decision, at least in part.
The reduction follows a decline in oil prices in the first three months of the year, which led to the first quarter’s poorest performance since travel restrictions went into effect at the beginning of the Covid epidemic in 2020.
But, western governments are concerned that Opec+’s decision to support prices may jeopardize attempts to reduce inflation, which were initially made more difficult by geopolitical tensions following Russia’s invasion of Ukraine.
“The reality is that inflation is unlikely to be declining any time soon short of an economic collapse, and with Opec+ unexpectedly announcing at the weekend that they would be cutting output by 1.1m barrels a day from next month, we could well see the economic boost offered by the recent decline in energy prices start to reverse if this morning’s surge in oil prices gains traction and starts to head towards $100,” said Michael Hewson, chief market analyst at CMC Markets UK.
The Opec+ output decrease, which may lead to an increase in fuel prices and consumer costs more generally, was vigorously opposed by the US. A representative for the US National Security Council said: “We don’t think cuts are advisable at this time given market volatility – and we’ve made that clear.”
Conclusion
According to the proposals, Saudi Arabia will reduce production by 500,000 barrels per day, Iraq by 211,000, and the United Arab Emirates by 144,000. A reduction in production was also declared by Kuwait, Kazakhstan, Algeria, and Oman. Beginning in May, Opec+ will reduce its production again.
Source: The Guardian
