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Abroad Did Not Let Us Down

Key OPEC countries decided to cut oil production together with Russia

Saudi Arabia and other major Arab oil producers, the UAE, Iraq and Kuwait, unexpectedly decided to support Russia’s efforts and unilaterally cut production. We are talking about a reduction of 1 million barrels per day from May until the end of the year, while Russia will extend for the same period the reduction in production by 500 thousand barrels already begun in March. OPEC+ countries call this step a preventive measure to stabilize the market. Analysts expect oil prices to rise in the short term, while Western experts note the continued cooperation within OPEC + and increased pressure on Western central banks due to a possible increase in inflation.

On April 2, the key countries of the OPEC+ alliance unexpectedly announced a voluntary reduction in oil production from May until the end of the year. Independent but timely coordinated statements were made by the authorities of Saudi Arabia, the UAE, Kuwait, Iraq, Algeria, Oman and Kazakhstan, while Russia confirmed its intention to continue its own 500,000 bpd production cuts that began in March. The announcement took the market by surprise: although the next monitoring committee of the OPEC+ deal is scheduled for April 3, no one expected changes in production quotas.

Formally, the current cuts are not included in the OPEC + deal, but for now they are a voluntary individual obligation. But from a practical point of view, the statements were made precisely by those largest oil producers in OPEC, which in reality produce in accordance with their quota, while other countries included in the cartel already produce below the permitted level.

In other words, production cuts are likely to be real, not “paper”.

In total, OPEC countries will reduce production by 1 million barrels per day (including Saudi Arabia by 500 thousand barrels, Iraq – by 211 thousand barrels), and Kazakhstan – by 78 thousand barrels per day. The decrease is about 5% of the current production of cartel members.

The Saudi Oil Ministry, in a statement, called the move a “preventive measure” to keep the oil market stable.

Deputy Prime Minister of the Russian Federation Alexander Novak attributed the reduction to high volatility and uncertainty in the market caused by the banking crisis in the US and Europe. In March, Brent oil prices fell to $70 per barrel for the first time since 2021 amid the bankruptcy of several banks in the United States and the problems of Credit Swiss, one of the largest banks in Switzerland, but by early April they recovered to almost $80 per barrel.

Experts’ opinions on how exactly the reduction will affect oil quotes are divided. Anton Usov from Kept believes that this move will only support prices at the current level in the medium term, but not lead to their significant growth. A significant impact on quotes could have a reduction in production in the amount of more than 10% of world supply, the expert believes. At the same time, he agrees that the reduction in production by the OPEC+ countries should reduce the discount of Russian Urals oil in relation to Brent and thereby increase the revenues of the Russian budget.

Pickering Energy Partners CEO Dan Pickering told Reuters he thinks the impact on oil prices will be “significant” and expects prices to rise by $10 a barrel.

Western analysts expect tensions between the US and Saudi Arabia to grow as higher oil prices will push inflation and make it even more difficult for the US Federal Reserve to find a balance between raising the key rate and maintaining financial and economic stability. In October 2022, the OPEC+ countries have already preventively reduced production by 2 million barrels per day (which, however, was more than half a “paper” reduction in the quota). The move, which touched on the socially sensitive issue of Western fuel prices, was taken weeks before the congressional elections, and US President Joseph Biden then threatened Riyadh with “consequences.” However, no further public steps were taken. At the same time, oil prices have been declining almost continuously since November 2022.

Saudi Arabia’s actions mean the preservation of practical cooperation between Russia and the OPEC countries, despite the introduction by the US and the EU of a ceiling on prices for Russian oil and Moscow’s decision to unilaterally cut production in March.

In fact, from May, the largest members of OPEC will join Russia in its unilateral reduction, and the balance of quotas and the ratio of market shares between the participants in the OPEC + deal will return to the level set when it was concluded in April 2020.

Source : Коммерсантъ