OPEC+ announced a surprise oil production cut that will exceed 1 million barrels a day, abandoning previous assurances that it would hold supply steady to maintain a stable market.
That’s a significant reduction for a market where — despite the recent price fluctuations — supply was looking tight for the latter part of the year. Oil futures weren’t trading when the cut was announced on Sunday, but the inevitable price reaction could add to inflationary pressures across the world, forcing central banks to keep interest rates higher for longer and amplifying the risk of recession.
Saudi Arabia led the cartel by pledging its own 500,000 barrel-a-day supply reduction. Fellow members including Kuwait, the United Arabia Emirates and Algeria followed suit, while Russia said the production cut it was implementing from March to June would continue until the end of the 2023.
The initial impact of the cuts, starting next month, will add up to about 1.1 million barrels a day. From July, due to the extension of Russia’s existing supply reduction, there will be about 1.6 million barrels a day less crude on the market than previously expected.
The move could once again flare tensions between the US and Saudi Arabia, a regional partner whose relationship with President Joe Biden’s administration has been tense.
In October last year, when OPEC+ made a surprise production cut of about 2 million barrels day just weeks before the US midterm elections, Biden vowed there would be “consequences” for Saudi Arabia. But the administration did not follow through after and the White House has recently praised several Saudi initiatives, including its decision to supply Ukraine with $400 million in energy and financial assistance.
The White House did not immediately respond to a request for comment.
A recently as Friday, delegates from the Organization of Petroleum Exporting Countries and its allies had been indicating privately that there was no intention to change their production limits.
Oil fell to a 15-month low last month due to the turmoil caused by the banking crisis, but prices had recovered as the situation showed signs of stabilizing. Brent crude, the international benchmark, closed just below $80 a barrel on Friday, up 14% from its March trough.
All fourteen traders and analysts polled last week by Bloomberg predicted no change. They were taking their lead from Saudi Energy Minister Prince Abdulaziz bin Salman, who had said last month that the current OPEC+ production targets are “here to stay for the rest of the year, period.”
From time to time, the prince delighted in wrong-footing speculators with unexpected supply changes. During one such intervention he warned that short-sellers would be “ouching like hell,” and for crude bears this latest move may be similarly painful.
(Story first published by Bloomberg)