The OPEC Plus group, which includes OPEC and allies including Russia, agreed on Sunday to increase crude oil production cuts to 3.66 million barrels per day, or 3.7 percent of global demand.
The sudden announcement contributed to raising prices by five dollars a barrel to more than $85 a barrel.
Here are the main reasons behind the OPEC Plus production cuts:
Concerns about weak global demand
Saudi Arabia said it had decided on 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 said that the crisis of Western banks was one of the reasons for the cut as well as “interference in market dynamics”, a term used by Moscow to describe the ceiling imposed by the West on Russian oil prices. Fears of a new banking crisis over the past month have led investors to dump risky assets such as commodities, sending oil prices down to nearly $70 a barrel from a record peak of $139 in March 2022. A global recession may lead to lower oil prices. Consultancy Redburn said the size of the latest cut may have been exaggerated unless OPEC feared a deep global recession.
punish speculators
The cut would also punish short sellers or those who bet on lower oil prices. Back in 2020, Saudi Energy Minister Prince Abdulaziz bin Salman warned traders against extreme speculation in the oil market, saying he would seek to make the market volatile. He added that speculators on the price of oil would be hit hard. Prior to the latest cut, hedge funds had reduced their net position in US benchmark WTI to just 56 million barrels by March 21, the lowest level since February 2016. Long positions outnumbered short positions betting on bulls. Down by just 1.39 to one, the lowest level since August 2016. “The latest cut will hurt those who are heavily speculating on oil,” said a source familiar with OPEC+ thinking.
The pursuit of higher prices
Many analysts said that OPEC Plus is keen to set a minimum level for oil prices at $80 a barrel, while UBS and Rystad expected a price jump back to $100.
However, excessively high oil prices pose a risk to OPEC+ as they accelerate inflation, which includes commodities the group needs to buy. It also encourages faster production gains from non-members of the Organization of the Petroleum Exporting Countries (OPEC) and investment in alternative energy sources. Goldman Sachs said that OPEC’s strength has increased in recent years as US shale oil’s response to rising prices has become slower and lower, partly due to pressure on investors to stop financing fossil fuel projects.
tension with Washington
Washington described the latest OPEC+ action as not recommended. The West has repeatedly criticized OPEC, saying it is manipulating prices and siding with Russia, despite the war in Ukraine. The United States is considering passing legislation known as NOPEC, which would allow for the forfeiture of OPEC assets on US soil if market manipulation is proven. OPEC+ criticized the International Energy Agency, the Western energy watchdog to which the United States is its biggest financial donor, for pulling oil stocks last year, in a move the agency said was necessary to lower prices amid fears that sanctions could hamper Russian supplies. However, the IEA’s predictions were never met, prompting OPEC+ sources to say it was politically motivated and designed to prop up the popularity of US President Joe Biden. The United States, which has pulled most stocks, said it would buy back some oil in 2023 but later ruled that out. JPMorgan and Goldman Sachs said the US decision not to buy back oil for reserves may have contributed to the move to cut production.