The OPEC+ group, which includes OPEC and allies like Russia, agreed on Sunday to increase crude oil production cuts to 3.66 million barrels per day, or 3.7% of global demand. This unexpected announcement raised prices by five dollars per barrel to over 85 dollars.
Here are the main reasons for OPEC+'s production cuts:
**Concerns About Weak Global Demand**
Saudi Arabia announced voluntary production cuts of 1.66 million barrels per day in addition to the current cuts of two million barrels per day, as a precautionary measure aimed at supporting market stability. Russian Deputy Prime Minister Alexander Novak mentioned that the crisis in Western banks was one reason for the cuts, along with "interference in market dynamics," a term Moscow uses to describe the price cap imposed by the West on Russian oil. Concerns over a potential new banking crisis last month led investors to shed high-risk assets such as commodities, causing oil prices to fall to around 70 dollars per barrel from a record peak of 139 dollars in March 2022. A global recession could further drive down oil prices. The Redburn consultancy stated that the latest cuts may be exaggerated unless OPEC fears a significant global recession.
**Punishing Speculators**
The cuts will also penalize short sellers or those betting on declining oil prices. Back in 2020, Saudi Energy Minister Prince Abdulaziz bin Salman warned traders against severe speculation in the oil market, stating he would aim to make the market volatile, and that speculators on oil prices would be greatly affected. Before the latest cuts, hedge funds had reduced their net position in West Texas Intermediate crude to just 56 million barrels by March 21, the lowest level since February 2016. The number of long positions betting on price increases outweighed short positions betting on declines by a ratio of 1.39 to one, the lowest since August 2016. A source familiar with OPEC+ discussions told Reuters that "the recent cuts will hurt those heavily speculating on oil."
**Seeking Higher Prices**
Many analysts believe that OPEC+ is keen to establish a price floor for oil at 80 dollars per barrel, while UBS and Rystad predicted a rebound in prices to 100 dollars. However, excessively high oil prices pose a risk to OPEC+ as they accelerate inflation that affects goods the group needs to purchase. High prices also encourage faster production gains from non-OPEC countries and investment in alternative energy sources. Goldman Sachs noted that OPEC's strength has increased in recent years, as the U.S. shale oil industry's response to rising prices has become slower and less, partly due to pressure on investors to stop funding fossil fuel projects.
**Tension with Washington**
Washington described the latest OPEC+ move as "unwelcome," and the West has repeatedly criticized OPEC for manipulating prices and siding with Russia amid the war in Ukraine. The U.S. is considering passing legislation known as "NOPEC," which would allow for the seizure of OPEC assets on American soil in cases of market manipulation. OPEC+ criticized the International Energy Agency, a Western energy watchdog mostly funded by the U.S., for drawing from oil reserves last year, a step the agency stated was necessary to lower prices amid fears that sanctions might disrupt Russian supplies. However, the IEA's forecasts never materialized, prompting OPEC+ sources to claim they are politically driven and designed to bolster the popularity of U.S. President Joe Biden. The U.S., which drew down most of its reserves, stated it would buy back some oil in 2023 but later excluded that possibility. JPMorgan and Goldman Sachs indicated that the U.S. decision not to repurchase oil for reserves may have contributed to the production cut move.
