OPEC+ Announces Surprise Cut to Oil Production

The OPEC+ group has announced that it will further reduce global production by 1.16 million barrels per day until the end of the year. This move is anticipated to exacerbate the central bank’s challenge of curbing global inflation. However, this action is primarily aimed at protecting the alliance’s larger production strategy from political influence.

Washington has criticized the independent initiative by eight OPEC+ producers, including Saudi Arabia, Kuwait, and the UAE. In this initiative, they will remove more than 1 million barrels per day from global oil markets. This adds to Russia’s existing intentions to reduce its production by 500,000 barrels per day from February output levels until the end of the year, effectively bringing the combined voluntary cuts of OPEC+ to more than 1.6 million barrels per day.

“We don’t think cuts are advisable at this moment, given market uncertainty — and we’ve made that clear,” said a spokesperson for the U.S. National Security Council, according to Reuters. The Biden administration has criticized the production cuts, citing the impact on inflation and accusing the group of being friendly with sanctions-hit Russia. The reduction in production leads to decreased supply, causing higher prices for importing countries and, therefore, boosting headline inflation figures.

In December 2022, relations became tense when the oil group decided to reduce output by 2 million barrels per day until the end of 2023. This decision was upheld by ministerial and technical committees since then, and earlier this week, the OPEC+ Joint Ministerial Monitoring Committee concluded a meeting without making any changes to the group’s formal production policy.

Read more about energy from CNBC Pro

Formal group action may no longer be necessary, since front-month June Brent futures prices increased by $4.44 per barrel from the Friday settlement to $84.33 per barrel on Monday morning in London (5 a.m. ET). Some analysts are warning of prices reaching $100 per barrel, while Goldman Sachs predicts that Brent forecasts may rise by $5 per barrel to $95 per barrel by December 2023.

“The anticipated increase in oil prices for the rest of the year as a result of these voluntary cuts could fuel global inflation, prompting a more hawkish stance on interest rate hikes from central banks across the world. That would, however, lower economic growth and reduce oil demand expansion,” said Victor Ponsford of Rystad Energy in a research note.

Investor Tamas Varga of oil broker PVM flagged the broader political risks associated with the 1.6 million barrels per day in voluntary cuts. He predicted that headline inflation would increase faster than previously expected.

The NOPEC bill refers to proposed U.S. legislation that would open OPEC+ countries to potential antitrust legal action. The U.S. may attempt to counteract the price hikes by releasing further volumes from its Strategic Petroleum Reserve, but one anonymous OPEC+ delegate said that Washington has hampered its fight against inflation by blocking global access to oil supplies from Venezuela and Iran. European Union nations also refrain from purchasing oil from Russia in solidarity with Ukraine.