Why OPEC+ Made a Surprise Output Cut and What’s Next for Oil
Prince Abdulaziz bin Salman, the Saudi energy minister, has spoken of his intent to have speculators “ouching like hell”. The latest move of the Opec+ group of oil exporters should have achieved that.
The Opec+ members are making a “voluntary” cut, that is over their current commitments, of over 1.1 million barrels per day, running from May until at least year-end. Russia had already announced it would extend its unilateral 500,000 barrel per day reduction from June until the end of the year.
The key question is: why now? Oil prices dropped into the low $70s per barrel during March in the face of worries over the banking sector, but they had begun climbing again over the past week.
In making such a cut, Opec+ has to have its eyes on two factors: competition, and demand. On the competition side, with Russia under sanctions and within the tent, the US’s shale surge apparently at an end, and international companies only cautiously increasing budgets, there is no other large supply increment on the horizon. As for demand, even though Brent crude jumped to $85 per barrel when trading opened on Monday, this is not particularly high in historic terms.
The inflation-adjusted average this century is $74 per barrel; allow for the last year’s inflation and that would be close to current levels. Prices were already widely expected to cross $100 per barrel later this year, and that prospect now looks even more likely. That would add some inflationary pressure and possibly require further interest rate rises.
But in the case of an economic slowdown, Opec+ may be pleased to have acted pre-emptively to avoid inventories building up too much. It’s possible that some of the major exporters are seeing weaker demand from their physical customers over the next two months.
