The world’s most influential oil cartel, OPEC+, has agreed to its deepest cuts in production since the pandemic, despite tight markets and US pressure.
OPEC+, which includes OPEC and allies such as Russia, have decided to reduce oil output by 2m barrels per day following a meeting in Vienna, Austria.
The organisation is eager to bolster oil prices, which have slid from a 14-year high of $139 per barrel to around $90 per barrel on both major benchmarks this month.
This comes amid growing expectations of a recession, leading to reduced demand across major economies.
Following the announcement, Brent Crude and WTI Crude surged around two per cent to $93.70 and $88.12 respectively.
It is the second consecutive month OPEC+ has cut its output targets, having slashed them by 100,000 barrels per day last month.
OPEC+ first pledged to boost production levels this year after swingeing cuts were implemented in 2020 when the pandemic slashed demand.
However, it has routinely failed to meet pledged hikes in production.
In August, OPEC+ missed its production target by 3.58m barrels per day as several countries were already pumping well below their existing quotas.
The group has consistently pointed to underinvestment and spare capacity shortages for its failure to boost production, despite continued calls from Western countries to ramp up supplies to ease and escalating cost of living crisis.
OPEC+ resists US pressure
Prior to today’s announcement, the US was pressing OPEC+ producers to avoid making deep cuts, with President Joe Biden looking to prevent a rise in gasoline prices ahead of key midterm elections in November.
However, US pleas have fallen on deaf ears, with Aramco boss Amin Nassir yesterday hinting at Saudi Arabia’s frustration at the focus on recession headwinds over tight markets.
Ole Hansen, head of commodity strategy at Saxo Bank, told City A.M. the cut was really 1m barrels per day in real terms with major producers such as Russia, Nigeria and Angola persistently missing targets.
He considered the cut a “bit of a mystery” given that the price has remained near $90 which is both historically high and acceptable to most producers and buyers.
He explained: “The winner is Russia while the loser is the global consumer who does not need higher energy prices going into an economic slowdown.
“Russia is currently producing well below its baseline and will therefore not be obliged to make any cut, but with the upcoming embargo on its oil Russia is likely to see a further loss in production while having to accept a deeper discount of the oil sells.”
Nathan Piper, head of oil and gas research, argued that the cuts reflect OPEC’s determination to reverse the slide in prices and exert its influence.
He said: “This underlines the organisation’s appetite to try to control the oil market going into potential curtailment of Russian volumes later this year and the implementation of oil price cap.”
Craig Erlam, senior market analyst at OANDA, also considered the measure to be an attempt by the cartel to get a grip on the market and to reduce the deficit between pledged output and production levels.
“Either way, prices are set to remain high for the foreseeable future,” he said.