In what seems to be the biggest cut in oil production since 2020, OPEC+ will limit its collective oil output by 2 million barrels a day in a strong attempt to raise global oil prices and take it beyond the $90 benchmark.
At the 33rd OPEC and non-OPEC Ministerial Meeting held in Vienna, Austria, on October 5, 2022, the 24 countries that form part of the OPEC + decided to cut down overall oil production by 2 million barrels per day.
Some background: OPEC + refers to the 24 countries that are a part of the Organization of Petroleum Exporting Countries that hold about 80% of the world's oil reserves. Since they are the world's primary oil suppliers, any change in production by this cartel directly impacts global oil prices. If OPEC+ decides to cut oil supplies, the world will see a direct rise in oil prices, thus shooting up inflation rates (as if they aren't already soaring through the roof).
During the Russia-Ukraine war, global oil prices peaked at an all-time high and crossed $120 per barrel. So, since March 2022, OPEC and the western countries (especially the US) opened the floodgates and started releasing oil in large quantities from their reserves. Of the 180 million barrels that have been released since March 2022, 75% of them have come from US's Strategic Petrol Reserves. This has caused an increase in supply over demand and led to a visible drop in global oil prices, which recently dropped below $85 in September 2022.
Why the shift now? Saudi's intent of raising prices and cutting oil production has been evident for a few weeks now. US President Joe Biden even visited Saudi Arabia to urge them to increase oil production. But it seems like all pleas went on deaf ears since OPEC has decided to reverse its production policy and cut down production.
Why would #SaudiArabia hike the price oil for the US (but not other nations), just as @JoeBiden and @TheDemocrats face a crucial midterm election?— Jonah Blank (@JonahBlank) October 6, 2022
Ask the Orb: https://t.co/FkQgXUUoQF pic.twitter.com/Tl3zq9Oi1P
1. Oil production: Though the quantum of price impact is not clear, a production cut of 2 million barrels might make quite a difference in times when the world consumes 100 million barrels of oil every day. As per an OPEC report, Russia, Saudi Arabia, Iraq, UAE, and Kuwait will be the OPEC countries that will be voluntarily making the majority of oil production cuts, starting November 2022.
2. Oil Prices: Global oil prices might increase and range between the $90 to $100 benchmark. International benchmark brent crude futures traded at $92.82 a barrel on October 5 in London, up around 1.1%. US West Texas Intermediate futures stood at $87.37, almost 1% higher.
3. Politics: The supply cut will increase tensions between Saudi Arabia and the US, since President Biden has been trying his best to control gas prices in the US before the US midterm elections, by urging the Middle Eastern countries to shoot up oil production. In a statement by US officials, President Biden was ''disappointed'' at this 'short-sighted' move since this will impact middle and lower-income countries with higher electricity bills. The US will release 10 million barrels from its own Strategic Petroleum Reserves.
So it looks like, petrol prices are bound to go up again.