OPEC+ surprise cuts hinder speculations: Experts

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The OPEC+ Joint Ministerial Monitoring Committee (JMMC) said the April 2 decision taken by Saudi Arabia and other members to voluntarily reduce oil production is a preemptive measure that aims to shore up market stability.  

Following the voluntary cut, total additional voluntary production adjustments will reach 1.66 million barrels per day (bpd) as of May until the end of 2023. 

Saudi Arabia approved a voluntary output cut of 500,000 bpd; Iraq (211,000 bpd); UAE (144,000 bpd); Kuwait (128,000 bpd); Kazakhstan (78,000 bpd); Algeria (48,000 bpd); Oman (40,000 bpd); and Gabon (8,000 bpd) starting May until the end of 2023. 

In a phone call with Argaam, economist and oil expert Mohammed Al-Sabban, described the OPEC+ decision as a preemptive and proactive measure, as markets witness a wave of higher interest prices and inflation.

The Kingdom was the major contributor to decision engineering. However, it was taken by many member countries, Al-Sabban affirmed, explaining that OPEC+ conducts academic and economic studies away from politics.

Kamel Harami, an oil analyst, said that the surprise output cut is aimed to hinder speculations after the price fluctuations recently seen in West Texas Intermediate (WTI) crude and Brent, which came for no apparent reason, especially at times of a drop.

Faisal Al Fayek, energy affairs advisor and former OPEC director of energy studies, explained that the OPEC+ decision was surprising. While no one can predict the cartel’s decision, February’s production levels showed a possibility for a reduction. 

The total production by OPEC+ nations currently stands at 44 million bpd, with Saudi Arabia and Russia producing 10.5 million bpd and 9.9 million bpd, respectively. 

Oil Prices

According to Harami, the decision will leave prices to be set freely by oil markets without any intervention. The price range will be suitable for the OPEC+ nations. He expected $80 per barrel to be the appropriate price for OPEC+. 

Al Fayek added the OPEC+ alliance neither controls oil prices nor targets a certain price cap. It rather eyes a balance between supply and demand, as well as a stable global economy. The recent decision is a proactive strategy to ensure continued stability in oil markets. 

The oil market witnessed unfair prices at a time when oil fell to the lowest level in almost a year. Oil derivatives soared above the price of an oil barrel by nearly two times. However, the prices of refined products usually do not exceed 20% of an oil barrel on average. 

Cloudy Landscape 

The market witnessed new changes after the banking system crisis, which left the economic outlook cloudy for balancing supply and demand. Even if the implications of the financial crisis on prices relatively vanish, the impact on investors will take more time. This will affect the future of oil supplies, Al Fayek said.

Moreover, higher interest rates changed the thoughts of oil investors about pumping investments in upstream activities, amid tight liquidity and lower prices in the second half of 2022. 

The negative sentiment raised by pessimistic news of financial sectors in mid-March led oil prices to fluctuate and drop by nearly $14 per barrel. This marked the sharpest fluctuations this year, triggered by financial concerns that impacted on economic growth and demand growth forecasts.

Elsewhere, Al-Sabban said the Federal Reserve took unilateral decisions that weigh on markets. It did not consider global banks, but rather continued to hike rates despite global warnings.

He added that the banking crisis is still ongoing, and may significantly intensify later, noting that OPEC + took this decisive decision amid recessions fears.

The organization took a proactive decision last October to cut output by two million bpd, and this has not caused an uproar. However, the decision proved effective as the markets were affected by the poor performance of global economic indicators, including the persistence of recession, banking sector turmoil and lack of rapid response from the financial policies to support the global economy.

He indicated that the JMMC is likely to decide to increase production in the next meeting if it sees a shortage in supplies.

Sanctions on Russia 

OPEC+ is an economic not a political alliance, as it is described by some Western countries, Al-Sabban stressed.

He pointed out that Russia preceded and banned oil exports to countries sticking to price cap. Official data showed that its output has not been significantly impacted in consequence.

The Western sanctions on Russia failed miserably and are reversing on the countries consuming oil, gas or various energy sources. 

The cartel members see that it is unreasonable to treat OPEC+ members unfairly, like Russia, in terms of imposing sanctions and boycotting Russian oil and imposing a price cap, said Harami.

Moreover, it is very difficult to leave major oil-producing and exporting countries such as Russia, Saudi Arabia, the UAE and Iraq vulnerable to speculation, as this may be a reason for direct intervention in the markets, he added.

He further expected that no new action would be taken at the organization's next meeting in June after this step, noting that the markets are monitored, and the appropriate decision would be taken.

For his part, Al Fayek said that further production cuts are no meant as a response to the G7 decisions to put a price ceiling on Russian oil and derivatives as a way to reduce its oil revenues. It, however, came as a result of market pressure and fears of an economic recession.

Global oil markets are in a state of severe uncertainty, which was deepened when liquidity exited the market months ago. This led to a shortage of large selling operations in the oil futures markets, which suffered strained liquidity since the beginning of the year, amid fluctuating prices that did not motivate speculators to bet. This, in turn, kept oil prices at low levels compared to the prices of other energy sources, Al Fayek explained.