On Monday, OPEC+ announced that the cartel has agreed to a modest production cut. Crude futures have been battered of late amid threats of a global recession, Chinese lockdowns and virus outbreaks, as well as the threat of Iranian crude being allowed back into the market as part of a new Iranian nuclear deal with the West.
ExxonMobil (XOM) and Chevron (CVX) were up slightly Friday, as oil stocks in general gained in the face of the current pullback.
Crude futures were up 4% Monday to over $90 per barrel, but then fell back, settling on a 2% gain by the afternoon.
Oil prices had skyrocketed earlier in the year as the shock of the Russian military action in Ukraine combined with subsequent Western sanctions on Russian crude. The sanctions produced a period of reorganization of supply flows, as Russian crude headed to China and India, who ignored the sanctions in return for a Russian discount on the crude supplies. In the West, prices skyrocketed as high as $130 per barrel as the Russian flows left the market, but stabilized as the non-Russian supplies which had been heading to China and India were diverted back to the Western markets. Rising interest rates, a strengthening dollar, Chinese lockdowns, and the threat of a global recession have since caused a 20% drop in the price of European and American benchmarks Brent and West Texas Intermediate.
OPEC+ agreed to a 100,000 barrel per day reduction in output, starting in October. It follows on the decision to increase output 100,000 barrels per day in September. The decision came as a surprise as most analysts were expecting no change at the meeting.
Analysts note however that Monday’s decision may not change the production output. Several OPEC+ nations have been having difficulty meeting their production quotas, due to various causes ranging from poor investment to political battles between competing elected officials, such as in Libya. In August, OPEC’s output was 29.6 million barrels per day, which was below the 30 million barrels per day it produced in April, and well below the 32.1 million barrels per day it was producing in April of 2020. Given nations were already short of their production quotas, the reduction in the quotas may not restrict their output.
One factor behind the cuts is the prospect that Iran may be allowed to re-enter the market as part of a revival of the 2015 Iranian nuclear agreement. If an agreement is reached, it is expected it will involve allowing one to two million barrels per day of Iranian crude onto the market.
Phil Flynn, senior analyst at the Price Futures Group wrote, “OPEC has already made it clear that if Iranian oil is allowed back on the market that they would adjust their production to not tank the price of oil.”
US output meanwhile is slowly increasing. According to the Energy Information Administration, output in June was 11.82 million barrels per day. While that was the highest level since April of 2020, it was less than the record of 13 million barrels per days seen in November of 2020.
