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While Saudi Arabia said its cut is a precautionary measure that is aimed at supporting the stability of the market, experts are positive that many OPEC nations do not want to relive the crash that followed the 2008 crisis.
Some members of the Organization of Petroleum Exporting Countries (OPEC) and its allies have decided to cut oil production rates beginning in May 2023. As reported by CNBC, the rate cut will last until the end of the year and will see Russia cut daily production by 500,000 barrels in what will culminate in at least 1.16 million barrels daily from the projected time.
The news has sent Brent Crude Futures up by 5.07% to $83.95 with the futures tied to the West Texas Intermediate jumping 5.17% to $79.59. The positive sentiment on the Futures is based on the possibility of an increase in the oil price based on the supply crunch and the potential imbalance that a higher demand might stir.
There have been a lot of projections concerning this production cut as analyst believes this will stir an impact like non ever recorded.
“The selected involvement of the largest OPEC+ members suggest that adherence to production cuts may be stronger than has been the case in the past,” Commonwealth Bank of Australia’s Vivek Dhar said in a note.
Besides the planned cut by Russia, Saudi Arabia also seek a 500,000 cut in its daily production while the United Arab Emirates (UAE) will join the campaign with a 114,00 daily cut. The production cut move has also received a commitment from Algeria, Oman, Kazakhstan, Iraq and Kuwait amongst others.
A major implication of the production according to experts will be hinged on a skyrocketing price per barrel of oil.
“OPEC+‘s plan for a further production cut may push oil prices toward the $100 mark again, considering China’s reopening and Russia’s output cuts as a retaliation move against western sanctions,” CMC Markets’ analyst Tina Teng told CNBC.
OPEC Oil Cut and the Cautionary Tale
The rationale to cut oil production might vary from one OPEC country to the other. While Saudi Arabia said its cut is a precautionary measure that is aimed at supporting the stability of the market, experts are positive that many OPEC nations do not want to relive the crash that followed the 2008 crisis.
“They’re looking into the second half of this year and deciding they don’t want to relive 2008,” said Bob McNally, president of Rapidan Energy Group, who noted that oil prices crashed from $140 to $35 in six months at the time.
According to McNally, China will be at the forefront of driving this new demand burst and price upshoot if the country can increase its daily demand to 16 million barrels. He also noted that the irregularity in Russia’s energy production as a result of the ongoing Western sanctions may also be a major trigger.
In all, the production cut will be a true measure to cut down on output and the move is bound to crush the impact of Central Banks rate hikes over the past year.