On Sunday, in a surprise move, Saudi Arabia and other OPEC+ oil producers announced they were implementing a further 1.16 million barrel per day (bpd) cut in oil production. Analysts predicted the cuts would trigger an immediate spike in oil prices, and the United States called the cuts “inadvisable.”
Combined with previous cuts OPEC+ has committed to, the new round of cuts brings the total volume of cuts by OPEC+ to 3.66 million barrels per day, which is the equivalent of 3.7% of the global demand.
The announcement came one day before OPEC+ holds a virtual meeting of its ministerial panel, including Saudi Arabia and Russia. The meeting had been expected to announce it would adhere to its previous commitment of 2 million barrels per day which were already in place until the end of 2023.
Last month oil prices had dropped toward $70 per barrel, the lowest they had fallen in 15 months, after a series of banking crises triggered concerns of a global economic crisis that could yield a global slowdown in demand.
Despite the fall in prices, analysts had not expected any further actions to support the market by the cartel after sources claimed further production cuts were not on the table, and crude began to recover on its own toward $80 per barrel.
The head of investment firm Pickering Energy Partners said on Sunday that the latest production cuts could be expected to lift oil prices by $10 per barrel. Oil broker PVM said it expects to see an immediate spike in prices as soon as trading starts after the weekend.
PVM’s Tamas Varga said, “I expect the market to open several dollars higher … possibly as much as $3. The step is unreservedly bullish.”
Saudi Arabia announced it would cut production by 500,000 bpd, with the Saudi energy ministry noting the Kingdom was imposing a voluntary reduction to support the stability of the oil market. Iraq has promised to cut production by 211,000 bpd. The UAE will cut production by 144,000 bpd. Kuwait will cut by 128,000 bpd. Oman will cut its output by 40,000. Gabon would make a cut of 8,000 bpd. Algeria will cut production by 48,000 bpd, and Kazakhstan will cut production by 78,000 bpd.
Amrita Sen, founder and director of Energy Aspects, said, “OPEC is taking pre-emptive steps in case of any possible demand reduction.”
OPEC+ had agreed last October to an output cut of 2 million bpd, to take effect in November and last through the end of the year. The move angered Washington, which had worried already high energy prices would only increase off the tighter supply.
The Biden administration has said it sees the current production cuts as unwise.
A spokesperson for the National Security Council said, “We don’t think cuts are advisable at this moment given market uncertainty – and we’ve made that clear.”
The new voluntary cuts will begin in May, and continue through the end of the year.
On Sunday, Russia’s Deputy Prime Minister Alexander Novak said that Russia would extend its voluntary cut of 500,000 bpd through the end of the year. Moscow had announced those cuts on its own initiative in February, in response to the implementation of Western price caps on Russian seaborne shipments of petroleum products.
Not all OPEC+ members were taking part in the production cuts, as some are already pumping well below their production quotas due to insufficient production capacity.
