OPEC+’s Surprise Cut: Is the Global Economy Ready?

In early April, I wrote the following piece first published by Middle East Eye on the coordinated voluntary cuts announced by several OPEC+ members.

The move reflects concern about global demand and what had become very bearish positioning – attempt to squeeze out speculators.

• Unlike Fall 2022 cut or even recent, Russian announced but only partly implemented cut, The countries involved seem more credible than the full group, suggesting that much of the cut will be implemented, especially from GCC.
• this suggest tighter market and higher prices unless there is a major drop in demand. This will make both fighting inflation and implementing the price cap more difficult.
• GCC likely to make sure that Russia doesn’t free-ride and take too much market share. it will likely face pressure to cut production as pledged.
• US missed opportunity to communicate how they would operate two-way corridor for SPR. Even if timing wasn’t right last month, communicating terms of SPR refilling key tool to make sure it’s not just a one-way support.
• Much depends on how global rise in debt service costs, as recently seen in banking stress and China’s re-opening affects demand. Risks tilted towards higher prices as OPEC+ takes opportunity.

But read the piece here extracted below.

Over the weekend, Saudi Arabia announced a “voluntary” cut of 500,000 barrels per day in oil production. This was followed by similar announcements from several other Opec+ members who also promised to trim production.

The move highlights the considerable concern that producers have about the state of oil fundamentals, their desire to regain market share and to stabilise prices well over $80 a barrel. It also reflects their desire to reverse financial market sentiment and punish speculators. Most of the countries involved in this voluntary cut are credible producers likely to comply with these targets, suggesting the risks may be tilted towards undersupply of oil.

The move went in the face of very recent guidance from producers, that they would stick to recent production until the end of the year. The move partly reflects concern that oil demand and global growth are failing to pick up as strongly and as quickly as Opec anticipated.

Many market actors expected even stronger energy demand from China after it ended zero Covid, while other actors are worried about the risks of continuing stress from global banks that are facing losses from their bond portfolios. 

How effective the cut is depends on whether the participants actually cut and how weak the global outlook actually is. As with any target cut, the first question is how credible the decision is – ie whether producers actually comply. In the context of Opec, this depends on which countries are participating, as many Opec+ members are unable to – or reluctant to – change production.