Oil soars after surprise cuts by Opec members

Eight Opec+ members announced cuts in oil production as early as May, which sent oil prices soaring. This decision aims to bring prices back up after the recent fall, and shows that Opec+ is ready to defend a floor price well above $80 a barrel.

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Oil prices jumped on Monday in the wake of the shock announcement by Opec members of a drastic cut in their production in May, in an attempt to boost prices after the recent fall.

In total, eight of the 23 participants in Opec+, which brings together the Organization of the Petroleum Exporting Countries (Opec) and its partners, have decided to cut their volumes by 1.16 million barrels per day, led by Saudi Arabia. The announcement has totally taken the market against the grain, which expected a status quo, the Saudis having “publicly and privately signaled”, until the meeting, “that they had no intention of intervening for the time being,” said analysts at Eurasia Group.

“They usually send out one or two trial balloons” before the meeting, to test the reaction of traders, recalled Andrew Lebow of Commidity Research Group. “But this time it was a slap in the face.” The alliance took note of these “voluntary adjustments” in production on Monday, following a long-scheduled technical meeting by video conference (JMMC). In unison with its members, it assured that it was “a precautionary measure to support the stability of the oil market. But for analysts, it is mainly to reap “additional revenue”, commented in a note Jorge Leon, Rystad Energy.

These cuts show that Opec+ will do everything to “defend a floor price well above 80 dollars a barrel”, he said, without worrying about criticism from the United States and other consumer countries, worried about galloping inflation. Under the effect of the banking crisis, crude oil prices have indeed fallen in March to the lowest in over a year, “a level unacceptable for members of the Opec”, explains to AFP Ibrahim al-Ghitani, an oil market expert based in the Emirates.

“Real Reductions”

After this concerted action by the large producers of black gold, the reaction of the markets was immediate: the two world references took off by about 8% at the beginning of the session, returning to their level before the tumult of the banking sector. Brent North Sea crude oil, the main European benchmark, for May delivery closed up 6.30% at $84.93. As for West Texas Intermediate (WTI), the most followed American variety, also for maturity in May, gained 6.27%, to 80.42 dollars.

Iraq, Algeria, Saudi Arabia, the United Arab Emirates, Oman, Kazakhstan, Kuwait and Gabon will therefore make significant cuts 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 to the end of 2023. In total, the volume left underground will be “about 1.66 million barrels daily,” Opec said. “Most of the cuts will be made by countries that produce at or above quota” set, which implies “real supply cuts” and a tightening of the market, DNB analysts noted. Other countries could also “announce their own cuts if they deem it (…) necessary”, according to the Deputy Prime Minister in charge of Energy Alexander Novak, interviewed by the Russian television Rossiya 24.

“It’s their business”

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 with the highest demand for black gold, is reopening its economy after lifting health restrictions. If the cuts do indeed reach the levels announced, “it will further stretch an already tight market,” warned Jorge Leon, who sees Brent rising to $110 this summer.

This announcement is in addition to what had already been decided in October, namely a volume reduction of two million bpd. This was the largest reduction since the emergence of Covid-19. This is another setback for Washington, which is advocating opening the black gold taps to keep prices in check, says Caroline Bain of Capital Economics. This production cut “is not timely,” said John Kirby, spokesman for the U.S. National Security Council, who sought to put its impact into perspective and indicated that the United States intends to continue “working” with Saudi Arabia.

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, underlines Caroline Bain. The Kremlin defended Monday a decision taken “in the interest” of the world market, to maintain prices “at the right level”, according to the spokesman of the Russian presidency, Dmitry Peskov. “Whether other countries are satisfied or not is their business,” he told the press.

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