On April 2, the OPEC+ nations reached an agreement to further reduce crude oil production by 3.66 million barrels per day (bpd), amounting to approximately 3.7% of the world oil demand. This decision came after several member countries had already committed to individual production cuts.
The unexpected announcement had an immediate impact on oil prices, causing them to surge by around $9 per barrel, with prices surpassing $87 per barrel in the following days.
The OPEC+ nations came together again on 4 June 2023, to discuss the further reduction of oil production.
To address the declining oil prices, Saudi Arabia, as the largest oil producers within the group, has decided to implement a significant reduction in its oil output for July.
This reduction comes in addition to the broader agreement made by OPEC+ to limit the supply of oil until 2024. The aim is to stabilize and support oil prices, which have been experiencing a decline.
According to Reuters, the OPEC+ group not only extended the existing cuts of 3.66 million barrels per day (bpd), but also decided to reduce the overall production targets from January 2024 by an additional 1.4 million bpd. This adjustment brings the combined output target to 40.46 million bpd.
This article aims to explore 6 reasons behind OPEC+ implementing oil production cuts.
OPEC+ Goals
The primary goal of OPEC+ is to stabilize the global oil market and maintain favorable oil prices. They do this by coordinating oil production levels among its member countries.
By collectively managing oil supply, OPEC+ aims to ensure a balance between global oil production and global oil demand. This involves implementing production cuts or increases as necessary to prevent oversupply or shortages, thereby supporting price stability and market equilibrium.
Reasons Why OPEC+ Is Cutting Oil Production
According to Reuters, the decision by OPEC+ to cut output is driven by 6 key reasons:
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Concerns About Weak Global Demand for Crude Oil and Fuel Oil
OPEC+ closely monitors global economic indicators, especially from major oil-consuming nations like China. Weak economic data and the potential impact of lockdowns due to the COVID-19 pandemic can indicate reduced demand for oil. To prevent oversupply and downward pressure on prices, OPEC+ may decide to cut output in response to these concerns.
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Punishing Speculators
Speculators who engage in short selling of oil, betting on price declines, can create volatility in the market. OPEC+ aims to discourage such speculation and stabilize prices by implementing output cuts. This sends a message to speculators that they may face losses if they continue to bet against rising oil prices.
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Rising Crude Oil Output from US
The increase in United States crude oil production poses a challenge for OPEC+ efforts to balance the market. Higher US crude oil output can contribute to excess supply, which could potentially lead to lower oil prices. To counteract this, OPEC+ may choose to cut production to maintain a favorable supply-demand balance and prevent a significant drop in prices.
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Tensions with Washington
Additional output cuts by OPEC+ could strain relations with major consuming nations like the United States. Historically, the US has been critical of OPEC's actions and has considered legislative measures to address perceived market collusion. OPEC+ must navigate these geopolitical dynamics while managing the oil market and considering the potential consequences of its decisions on international relations.
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Criticism of the International Energy Agency (IEA)
OPEC+ has voiced criticism of the IEA, an international energy organization, for its predictions and calls for oil stock releases. OPEC+ sources argue that such actions by the IEA are politically driven and aimed at boosting the ratings of United States’ President Joe Biden, rather than being solely based on market fundamentals. These criticisms highlight the complexities and differing perspectives within the global energy landscape.
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Need For Higher Nominal Oil Prices
Some observers argue that OPEC+ needs higher oil prices due to the devaluation of the US dollar resulting from extensive monetary policies in Western countries. As oil is traded in US dollars, higher prices are seen as necessary to compensate for the decreased value of the currency. This perspective underscores the economic considerations that factor into OPEC+'s decision-making.
Taken together, these factors influence OPEC+'s decision-making process regarding output cuts and the management of oil market dynamics. The organization aims to stabilize prices, balance supply and demand, address market speculation, and navigate complex geopolitical and economic factors that shape the global oil landscape.
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