Why is OPEC+ Cutting Oil Output?

Reuters
Monday, June 5, 2023

The Organization of the Petroleum Exporting Countries and allies including Russia, a group known as OPEC+ which pumps around 40% of the world's crude, agreed on a new oil output deal on Sunday.

Saudi Arabia, the group's biggest producer, will make a deep cut to its output in July on top of a broader OPEC+ deal to limit supply into 2024 as the group faces flagging oil prices.

A surprise announcement by OPEC+ in April to deepen production cuts helped to raise prices by about $9 a barrel to above $87 per barrel in the days followed.

Yet benchmark crude prices have shed those gains since, with Brent futures LCOc1 on Monday trading at just under $78 a barrel. O/R

On Sunday, in addition to extending the existing OPEC+ cuts of 3.66 million barrels per day (bpd), the group agreed to reduce overall production targets from January 2024 by a further 1.4 million bpd to a combined output of 40.46 million bpd.

The changes, however, included lowered targets for Russia, Nigeria and Angola simply to bring them into line with current production levels.

Here are the main reasons why OPEC+ cut output:

CONCERNS ABOUT WEAK GLOBAL DEMAND

Data from China has aroused fears that the economic recovery after coronavirus lockdowns by world's second-largest oil consumer is losing steam.

Russian Deputy Prime Minister Alexander Novak has also pointed to "interference with market dynamics", a Russian expression to describe a Western price cap on Russian oil.

Fears of another banking crisis in recent months have led investors to sell out of riskier assets such as commodities with oil prices falling to near $70 per barrel from a peak of $139 in March 2022.

A global recession could lead to lower oil prices. 

Oil prices also recently came under pressure from concerns about U.S. debt ceiling negotiations, though fears of a debt default by the world's biggest oil consumer have abated since a bipartisan deal was sealed last week. 


PUNISHING SPECULATORS


The planned cuts will also punish oil short sellers betting on oil price declines.

In 2020, Saudi Energy Minister Prince Abdulaziz bin Salman warned traders against betting heavily in the oil market, saying that those who gamble on the oil price would be "ouching like hell".

He repeated his warning ahead of Sunday's meeting, telling speculators to "watch out" which many market watchers and investors interpreted as a signal that OPEC+ could consider further output cuts.


US OUTPUT RISING

U.S. crude oil production is set to rise by 5.1% to 12.53 million barrels per day (bpd) in 2023 and by 1.3% to 12.69 million bpd in 2024, according to government forecasts.

This compares with around 10 million bpd as recently as 2018.

Meanwhile, Saudi's energy ministry said the country's output, the biggest chunk of OPEC+ production, would drop to 9 million barrels per day (bpd) in July from around 10 million bpd in May, in its biggest reduction in years.

Saudi output is set to rebound to around 10 million bpd from August, unless market conditions prompt the kingdom to extend cuts.

Russia, the world's third-biggest oil producer, is targeting production of around 9.5 million bpd until the end of the year and 9.3 million bpd next year.


TENSIONS WITH WASHINGTON

Additional cuts from OPEC+ could drive tensions with leading consuming nations that are trying to fight inflation.

Washington called OPEC+'s action in April inadvisable. 

The West has repeatedly criticised OPEC for manipulating prices and siding with Russia despite the war in Ukraine.

The United States is considering passing legislation known as NOPEC, which would allow the seizure of OPEC's assets on U.S. territory if market collusion is proven.

OPEC+ has criticized the International Energy Agency, the West's energy watchdog for which the United States is the biggest financial donor, for advocating oil stocks releases last year. The IEA had argued these were necessary to bring down prices given concerns that sanctions would disrupt Russian supply. 

The IEA's predictions of price strength never materialized, prompting OPEC+ sources to say it was politically driven and designed to help boost U.S. President Joe Biden's ratings.

The United States, which released most stocks, said it would buy back some oil in 2023, but later ruled that out.

OPEC observers also say the group needs nominal oil prices to be higher because money printing by the West in recent years has lowered the value of the U.S. dollar, the currency in which oil is traded.


Brent crude oil price https://tmsnrt.rs/3oDgnYU

(Reuters - Reporting by Ahmad Ghaddar, Dmitry Zhdannikov, Shadia Nasralla; editing by Barbara Lewis and Jason Neely)

Categories: Energy Activity Production

Related Stories

Pakistan’s OGDC to Start Production at ADNOC’s Offshore Block by 2027

CIP Reaches Financial Close for Offshore Wind Farm in Taiwan

Woodside Inks Long-Term LNG Supply Deal with China Resources

Second Hai Long Substation Heads to Project Site Offshore Taiwan

Valeura Wraps Up Infill Drilling Campaign in Gulf of Thailand

Eni, Petronas to Set Up Joint Venture for Assets in Indonesia and Malaysia

CNOOC Brings Online Second Phase of Luda Oil Field Project in Bohai Sea

SLB Names Raman CSO, CMO

ONGC and BP Sign Deal to Boost Production at India's Largest Offshore Oil Field

Petronas Greenlights Hidayah Field Development Off Indonesia

Current News

TMC Books Compressors Orders for FPSO and LNG Vessels

MODEC, Sumitomo Partner Up for Delivery of Gato do Mato FPSO

Chuditch Gas Field Up for Summer Drilling Ops as Sunda Reshapes Ownership Structure

EnQuest Bags Two Production Sharing Contracts off Indonesia

Hanwha Drilling’s Tidal Action Drillship En Route to Petrobras’ Roncador Field

China's ENN, Zhenhua Oil Ink LNG Supply Deals with ADNOC

MODEC Wins ExxonMobil Guyana’s Hammerhead FPSO Contract

India Stretches Bids Deadline for 13 Offshore Deep-Sea Mineral Blocks

Indonesia Awards Oil and Gas Blocks to Boost Reserves

Sapura Energy Nets $22.6M in Offshore Support Vessel Contracts

Subscribe for AOG Digital E‑News

AOG Digital E-News is the subsea industry's largest circulation and most authoritative ENews Service, delivered to your Email three times per week

https://accounts.newwavemedia.com