What happens to oil production?
OPEC+ countries, including Russia, announced that they have decided to continue the reduction of oil production systematically. It was reported by Saudi Arabia, Kazakhstan, UAE, Oman, Kuwait, Iraq and Algeria.
According to Russian Deputy Prime Minister Alexander Novak, the global oil market is currently experiencing a period of unpredictability due to the banking crisis in the US and Europe, and global uncertainty in general.
“As a responsible and preventive action, Russia is voluntarily cutting 500,000 barrels per day from the February average production level, determined by independent sources, until the end of 2023,” Novak said.
The Saudi Ministry of Energy said the kingdom will also voluntarily reduce oil production by 500,000 barrels per day from May to the end of 2023.
“Kazakhstan, together with other OPEC+ member states, will implement voluntary production cuts of 78,000 barrels per day from May until the end of 2023,” Kazakhstan’s Ministry of Energy said. said.
The UAE will reduce production by 144 thousand barrels per day, Oman – 40 thousand, Kuwait – 128 thousand, Algeria – 48 thousand, Iraq – 211 thousand.
Novak said in February that Russia will reduce oil production by 5%, or 500,000 barrels per day. Later, this measure was extended until July 2023. And now it will be valid until the end of the year.
Saudi Energy Minister Prince Abdulaziz bin Salman Al Saud also announced the production cuts of local companies. Bloomberg and Reuters wrote that OPEC+ will likely continue its policy until the end of the year and will not increase oil production.
what does this mean
According to Igor Yushkov, a leading analyst at the National Energy Security Fund, the OPEC+ members’ statement was unexpected – no insider published, even citing anonymous sources.
“This is an unexpected announcement for the market. And here we are not talking about the fact that the production quotas in OPEC + will be reduced, but about a real reduction in production volumes, because only a few states fill the quotas within OPEC +. Here we see that those who talk about voluntary reduction are actually countries that meet quotas, which can produce a lot, ”Yushkov said in an interview with socialbites.ca.
He believes that the market will react to the decline in oil production by rising prices. In the short term – within a few days – they could rise to $85 a barrel. But then the situation stabilizes and the cost of raw materials is partially recovered.
»The US Federal Reserve raised interest rates again, and the European Central Bank raised interest rates. This means that loans become more expensive, there is less money in the economy, and as a result, economic activity decreases, thus less fuel is needed. Less money comes into the stock market and accordingly, traders buy fewer futures and they start to come cheaper because the demand for futures is less and no one needs them.
And OPEC+ is now trying to keep the price around $80 a barrel. If this is not done, the price of oil could drop to $70 a barrel in a few months. Therefore, next week it will become polychoic and then I think it will consolidate in the region of $80 a barrel.”
The analyst explained the decline in oil production not only by market volatility, but also by the fact that China did not return to industrial activity so quickly after the lifting of coronavirus restrictions. OPEC+ countries expected Beijing to increase production and, accordingly, oil consumption. But that didn’t happen. At the same time, the USA may interpret the decision of the countries as hostile.
“I think it will be interpreted as how the US interpreted OPEC+’s quota cut decision last fall with hostile rhetoric. Washington later said it was against them for OPEC countries to help Russia. But in fact, the main goal of OPEC+, both then and now, is precisely to protect the price,” he said.
He noted that the total decrease in crude oil production of all countries will exceed 1 million barrels per day, which is a significant amount. And it will have an impact on the market.