OPEC+ Trims Oil Output

A press release from OPEC was released on April 3, 2023. OPEC announced that certain countries, both within and outside of the organization, had decided to reduce oil production. This news came as a surprise because it was kept secret until the official announcement. In the past, the media usually received information beforehand. However, there were public statements about the possibility of changing production volumes under consideration. OPEC+ used to manipulate the market by using verbal intervention. However, they decided not to use this tactic as it only has a temporary effect. Oil-exporting nations want to have a long-term influence on the market.

The OPEC+ members said they will cut production by 1.16 million bpd in May 2023. Russia also plans to cut by 500 thousand bpd from March 2023. This adds up to a reduction of 1.66 million bpd. This is a big deal globally. The market is currently balanced, but this reduction may lead to a deficit, affecting prices.

In April, some countries said they'll cut more oil than required by OPEC+ rules. This may cause the market to become more unbalanced. Some parties can't produce as much as they're allowed. Russia is one of them. But it was the states that are already doing enough that agreed to cut more. This will happen in April 2023.

There's an important pattern in OPEC+ to note. Before, they'd cut production quotas equally for everyone. But this meant that the actual reduction in supply was lower because some countries didn't produce as much as they were allowed. Now, they're cutting quotas differently. They're going by the actual amounts produced, since most countries have already reached their production caps. This means the gap between what's declared and what's real will be much smaller.

Russia plans to cut oil production by 500 thousand barrels starting in March 2023. This is a real cut, not just following virtual quotas. The OPEC+ member states announced that the reduction will continue until the end of 2023, making it long-term. Russia followed, deciding to also extend its voluntary cut until the end of the year to create a united front with its OPEC+ partners. This political factor is important for Russia.

The decision to decrease production prompted development. As soon as the OPEC+ group announced they would adjust production, oil prices spiked on the commodity exchange. However, this surge in prices was only a psychological reaction from the market, because some countries won't begin reducing their production until May.

Russia is benefiting from the OPEC+ decision to cut oil production. Deputy Prime Minister Alexander Novak announced in February 2023 that Russia would voluntarily reduce production by 500 thousand bpd. Cutting production is important for Russia to monetize its hydrocarbons profitably and reduce the discount on its oil. Russia wants to demonstrate to main buyers, such as India, China, and Turkey, that maintaining pre-sanction oil exports is not an end in itself. By reducing production and export volumes, Russia wants to negotiate a reduction of the discount. Other OPEC+ countries also want to balance the oil market to keep prices high.

There are benefits for everyone. If there are fewer oil tankers needed, the cost of transportation will decrease. Earlier this year, the global oil market wasn't running well because of transportation problems. Russia had to send their oil to Asia, while Middle Eastern countries sent their oil to Europe. This meant that more tankers were needed, which made the cost of transportation more expensive. With the OPEC+ decision, there will be less oil exported, which means less tanker transportation and more money for oil companies. This will also benefit Russia's budget because they'll make more money from export duty and MET, even with a discount on their oil prices.

The OPEC+ decision to cut production is good for politics. Mr. Novak said Russia will cut oil production in February, and some people thought it was because of sanctions. They said Russia doesn't have Western technology to make oil anymore, but this is not true for all producers. The decision shows Russia works with other countries and is not isolated. OPEC+ is only one example of this.

The OPEC+ countries decided to cut down oil production volumes, but Western media and decision-makers are not happy about it. This decision is seen as a real economic risk for them because the US and the EU are net importers of oil. When oil prices go up, the price of fuel increases quickly too, which makes people unhappy. It means less support for politicians, especially during election season in the US. It also leads to inflation because delivery costs are included in the cost of goods. Western media also thinks that Arab nations are helping the Russian economy with this decision.

The accusations show a problem. Western countries won't listen to OPEC+ states' explanations for reducing oil production. This causes conflict often. On October 5, 2022, Saudi Energy Minister Abdulaziz bin Salman didn't want to talk to a Reuters reporter at an OPEC+ press conference. The minister had given a 30-minute interview to Reuters previously, explaining the decision. But, editors replaced the article with one claiming that Saudi Arabia and Russia are working together to raise oil prices above USD 100 per barrel.

Western politicians and media think OPEC+ choices hurt them and cause conflict, mainly with Saudi Arabia. However, OPEC+ members only want to protect their own profits, not to harm the West. U.S. and EU policies led to OPEC+'s decision: high Fed and ECB rates slowed down their economies, so less oil was demanded. As a result, the price fell, and the interest rates led to fewer deals. The West doesn't care about oil-producing countries' interests, and they keep oil prices down through monetary policies. OPEC+ acted quickly after the U.S. raised rates on March 23, 2023, to keep prices from falling further. Without OPEC+'s decision, prices could drop below USD 60-70 per barrel.

Some OPEC+ countries have decided to cut oil production, which carries political implications. The decision comes as relations between the U.S. and Arab oil-exporting countries have been cooling. Thanks to the "shale revolution," U.S. oil production has increased since 2010, causing the country to cut purchases from other countries. Statistics reveal that the U.S. has given up on oil from the Middle East, but the country continues to receive stable supplies from Mexico and increasing supplies from Canada.

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Arab countries can see U.S. strategy to lessen dependence on Middle East markets as a move to be free in Middle East policies. Accordingly, Saudi Arabia will turn to China and Russia for support. It's noteworthy that China is now the biggest buyer of Saudi oil.

In the future, tension between the U.S. and OPEC+ states may increase. Oil prices are rising and causing inflation. To stop inflation, the U.S. and EU are raising interest rates, which puts pressure on oil prices. In response, producers may cut production, creating a vicious circle. The U.S. may try passing the NOPEC Act to put pressure on Saudi Arabia and other producers. This could cause a backlash and repeat the 1973 energy crisis. It's not likely to happen now, but recent events show anything is possible.

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