OPEC+ made an unexpected cut to output by 1.16 million barrels per day on Sunday, leading to an immediate surge in oil prices.
Saudi Arabia, the largest producer and leader of the group of 23 oil-exporting countries known as OPEC+, announced on April 2 that it will start a voluntary reduction of 500,000 barrels per day from May until the end of the year. The UAE, Kuwait, Oman, Iraq, Algeria, and Kazakhstan have also pledged to reduce output.
These cuts will be in addition to those of two million barrels per day already decided last October.
That move drew heavy criticism from U.S. President Joe Biden, as The Dallas Express previously reported, and led to him releasing an additional 15 million barrels of oil from the country’s Strategic Petroleum Reserve later that month to help curb rising prices.
U.S. officials are not happy with the more recent decision, either.
“We don’t think cuts are advisable at this moment given market uncertainty – and we’ve made that clear,” said John Kirby, spokesman for the National Security Council, per Reuters. Kirby also noted that the White House had been given “a heads up.”
Last year saw an annual average OPEC oil price of $100.08 per barrel, per Statista. OPEC+’s decision to cut output could potentially push oil prices toward $100 per barrel again.
Bob McNally, president of Rapidan Energy Group, said that Saudi Arabia’s decision was likely meant to stabilize the oil market and prevent a repeat of the 2008 crash, when oil prices dropped from $140 to $35 in six months, per NBC 5.
On March 15, oil prices dipped to the lowest levels seen since December 2021, per CNBC.
Saudi Arabia’s decision came after Russia’s Deputy Prime Minister Alexander Novak said the country would curtail oil production by 500,000 barrels daily until the end of 2023 “as a responsible and preventative action,” per the news release.
With these new cuts, McNally said OPEC+ members “are going to super tighten the market,” per NBC 5.
Yet Amrita Sen, the founder of Energy Aspects, believes that OPEC+ might go back on this decision later this year.
“I do believe if the market over tightens, exogenous issues or shocks fade, they will reverse this cut down the line so this isn’t set in stone for the rest of the year — but very clearly defending a [price] floor,” Sen said, per NBC 5.
The cuts to oil production may hinder recent efforts by the Federal Reserve to cool inflation.
“We could see inflation bottom out a little bit higher than anticipated, which may mean that the Fed continues their rate hiking a lot longer and further than many currently expect,” Paul Nolte, senior wealth adviser and market strategist at Murphy & Sylvest, told Reuters.
The Fed approved its ninth interest rate increase on March 22 despite growing uncertainty surrounding the stability of the U.S. financial system, as The Dallas Express previously reported.