U.S. President Joseph Biden

The world oil market was stunned on 2 April by OPEC+’s announcement that it will cut its daily output allowance by about 1.16 million barrels, bringing the total of recently announced cuts to roughly 3.66 million barrels or about 3.7 percent of global production, Reuters calculated.

The cuts, beginning in May and lasting at least until 2024, will be staged. About 1.1 million barrels will disappear from the market at first, with the full 1.16-million-barrel reduction taking effect 1 July.

The reductions are voluntary, but cartel members are expected to adhere to them in an effort to boost global oil prices, which have sagged under the weight of inflation, rising interest rates, and a glum economic outlook.

The reductions were announced the day before a meeting of OPEC+ leaders, at which they were widely expected to maintain the two-million-barrel reduction already in place through the end of this year.

As late as 31 March, OPEC+ delegates were making assurances that there would be no change in plans, according to Reuters.

Benchmark Brent crude oil had been trading at about $83 a barrel prior to this month’s banking crisis. With the failure of two American banks and Credit Suisse and Deutsche Bank looking shaky, the price fell below $73 but was approaching $80 at the end of last week.

News of the production cut shot the price from just below $80 to above $85 when trading in May futures contracts opened on 3 April. Gasoline jumped as much as 4.5 percent in some markets.

Last October, Nigeria’s oil minister Timipre Sylva said in a public comment that the cartel wanted to move Brent’s price to “around $90.”

Saudi Arabia will cut production by 500,000 barrels a day, Iraq by 211,000, the UAE by 144,000, and Kuwait by 128,000.

Russia had cut its production by 500,000 daily barrels beginning 1 March after Western allies put a cap on the price of its exported crude. Russia announced it will now maintain its reduced output through this year as part of the new agreement.

“OPEC is taking pre-emptive steps in case of any possible demand reduction,” Amrita Sen, founder of consulting firm Energy Aspects, told Reuters.

The Biden administration said the cuts were ill-advised.

“We don’t think cuts are advisable at this moment given market uncertainty and we’ve made that clear,” a National Security Council spokesperson said to Reuters.

Goldman Sachs immediately revised its outlook for oil prices, saying Brent is likely to be $95 by this December.

Brent was trading just below $85 at 5 p.m. U.S. EDT on 3 April. West Texas Intermediate oil, which benchmarks U.S. prices, had risen slightly above $80.

Oil supplies already were expected to tighten as this year progressed, as we detailed in “Investors Fear Peak Oil, Press Companies for Short-Term Gains” (23 Mar 2023).

However, the actual reduction resulting from the new round of cuts may be less than advertised. Iraq, Kazakhstan, and Nigeria are among OPEC+ members already producing less than their allowed levels.

Instead of 1.16 million barrels, the actual reduction could be closer to 700,000, according to a calculation by analyst Helima Croft at RBC Capital Markets.

In any case, “OPEC+ clearly want a higher price,” hedge fund manager Gary Ross at Black Gold Investors, said in a Reuters interview. The cartel “is following through on being proactive and ahead of the curve and is trying to rip oil prices from the grip of” the world’s sour economic outlook. 

TREND FORECAST: As we have often said before, OPEC, led by Saudi Arabia, sees its markets diminishing in the future as the world transitions to non-fossil fuels and to plastics made from feedstocks other than petroleum.

In response to global economic shifts, OPEC+ will continue to tweak oil prices to maximize the profits it can still extract from a resource that will see demand shrink in the coming decades.

The world economy is sinking into Dragflation, our Top 2022 Trend in which prices rise while economic productivity shrinks.

Absent a wild card event, such as war ramping up in Ukraine and a conflict between Israel and Iran in the Middle East, that will prevent oil prices from rising no more than slightly into triple digits. As the global economic slowdown continues, oil prices will stagnate, with the OPEC cartel continuing to adjust them to squeeze maximum revenue from whatever the current state of the market happens to be.

Again, however, there are the wild cards, and one being played now is the Ukraine War and the sanctions imposed on Russia by NATO and the United States, which contributed to this winter’s higher energy prices in Europe and other nations, may make this bad situation much worse. 

Those prices have fallen, thanks in part to an usually warm winter. Also, Europe has embarked on an ambitious plan to “green” its energy sector at top speed.

Still, global supplies of oil and gas will remain tight. Prices are more likely to stay aloft with OPEC continuing to manipulate supply.

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