OPEC’s surprise production cuts cause oil prices to surge, raising concerns around inflation and recession

Oil prices have surged after the Organization of the Petroleum Exporting Countries (OPEC) made a surprise cut to output targets, following Russia's recent decision to trim oil production by 500,000 barrels per day until the end of 2023.[0] The voluntary cuts amount to more than 1.6 million barrels per day, with Saudi Arabia reducing output by 500,000 barrels per day, Iraq by 211,000, the UAE by 144,000, and Kuwait, Algeria and Oman making smaller cuts.[1] This move has brought concerns around inflationary pressures back to the fore, adding to worries that higher prices and an aggressive monetary tightening by central banks could tip the global economy into recession.

Although there have been fluctuations in price over the past few months, there is a growing concern that the demand for oil worldwide will exceed the available supply, particularly towards the end of the year.[2] The announcement made on Sunday regarding the rise in oil prices has the potential to further exacerbate inflation, intensifying the already prevalent cost-of-living dilemma and increasing the likelihood of a recession. Oil analysts interpreted the surprise production cuts as a clear signal that Saudi Arabia and close allies were setting a floor for crude oil prices, below which they would take actions to prop them up.

The move has sent prices jumping from just under $80 per barrel of crude at market close on Friday to over $85 at one point on Monday, before falling back slightly.[3] Goldman Sachs predicts that crude oil will reach $95 per barrel by the end of the year, causing analysts to increase their expectations for future oil prices.[4] The voluntary cuts in oil production may lead to a projected surge in oil prices for the rest of the year, which could potentially cause worldwide inflation. This could result in central banks taking a more aggressive stance on interest rate increases. That would, however, lower economic growth and reduce oil demand expansion.[5]

Following the indication from OPEC+ delegates that production cuts were unlikely, a surprising decision was made to reduce production.[6] Naturally, within 72 hours, they made significant reductions in production as a subsequent action.[6] The Biden administration had previously promised the Saudis that they would refill the US Strategic Petroleum Reserve if prices fell into the 60s, but reneged on the promise.[6] It seems that this greatly angered the Saudis.[6]

Despite this, the White House has said that it does not think cuts are advisable at this moment, given market uncertainty, and that it is focused on prices for American consumers, not barrels.[7] Meanwhile, energy giants BP and Shell saw their share prices rise on Monday, with both rising more than 4%.[8]

The move by OPEC+, which includes Russia and Saudi Arabia, is seen by analysts as a deliberate attempt by the group's largest countries to push the price of oil higher, and could potentially push oil back above $100 a barrel.[3] The latest move by OPEC+ supports the view that the United States is losing influence with the bloc's core producers, such as Saudi Arabia and the UAE.[9]

Overall, the surprise production cuts represent a clear signal from OPEC+ that they are willing to take action to prop up crude oil prices. However, the move has also raised concerns around inflationary pressures and the risk of recession, which could have wider implications for the global economy. As such, it remains to be seen how the market will react to the latest developments and whether prices will continue to rise in the coming months.

0. “Oil Prices Jump on OPEC Output Cut. Exxon, Chevron Stock Rise.” Barron's, 3 Apr. 2023, https://www.barrons.com/articles/opec-saudi-arabia-crude-oil-production-cut-price-478667bd

1. “OPEC+ oil alliance announces surprise production cuts from May” Al Jazeera English, 2 Apr. 2023, https://www.aljazeera.com/news/2023/4/2/opec-oil-alliance-announces-surprise-production-cuts-from-may

2. “Oil prices surge after surprise move to cut output” BBC, 3 Apr. 2023, https://www.bbc.com/news/business-65157555

3. “OPEC+ oil cut delivers blow to ECB” POLITICO Europe, 3 Apr. 2023, https://www.politico.eu/article/opec-oil-cut-deliver-blow-european-central-bank-inflation/

4. “Oil prices surge as OPEC cuts output” The Washington Post, 3 Apr. 2023, https://www.washingtonpost.com/business/2023/04/03/oil-prices-opec

5. “OPEC+ just made the Fed's job more complicated. Here's what it did — and what could be next” CNBC, 3 Apr. 2023, https://www.cnbc.com/2023/04/03/oil-opec-just-made-the-feds-job-more-complicated-heres-what-they-did.html

6. “OPEC Cuts Nearly 1.2 Million Barrels Per Day, WTI Oil Surges Higher: Winners And Losers” Seeking Alpha, 2 Apr. 2023, https://seekingalpha.com/article/4591790-opec-cuts-wti-oil-surges-higher-winners-losers

7. “Janet Yellen says OPEC+ production cut is an ‘unconstructive act'” CNBC, 3 Apr. 2023, https://www.cnbc.com/2023/04/03/janet-yellen-says-opec-production-cut-is-an-unconstructive-act-.html

8. “Oil prices surge after OPEC+ producers announce surprise cuts” WKTV, 2 Apr. 2023, https://www.wktv.com/news/focus-economy/oil-prices-surge-after-opec-producers-announce-surprise-cuts/article_77412d6c-55d8-568c-ae52-42215747d511.html

9. “CNBC Daily Open: Oil is the Fed’s new headache” CNBC, 3 Apr. 2023, https://www.cnbc.com/2023/04/04/cnbc-daily-open-asia.html

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