OPEC+ Announces Larger than Expected Oil Cuts, Fear Rises Over Price Surge

UTC by Bhushan Akolkar · 3 min read
OPEC+ Announces Larger than Expected Oil Cuts, Fear Rises Over Price Surge
Photo: Depositphotos

The OPEC+ have surprised the western nation by announcing larger-than-expected production cuts which could drive oil prices higher by the year end.

On Wednesday, October 5, the group of OPEC+ nations announced that they would be cutting down oil production by 2 million bpd starting November 2. This was greater than the expected squeeze of 1m to 1.5m barrels in an already tight market.

The decision led the price of oil to soar as brent crude jumped 2% at $93.80, its highest level since September 15. Because of the gaps between targets and output, Goldman Sachs is predicting the actual production cuts at half a million barrels daily.

OPEC+ has been undershooting its production targets for months. Thus, many analysts note that the production cuts agreed upon during this meeting was a move at moving targets closer to actual production. The Joe Biden administration was hoping to persuade the Middle Eastern nation to not curb any supplies. This would have further increased fuel prices and added to soaring inflation.

Biden called the latest decision “unnecessary”. There was also a hint from President Biden that America would release more oil from its strategic reserves to control costs. Next month, the Biden administration will be releasing an additional 10m barrels from the US Strategic Petroleum Reserve.

Jake Sullivan, the national security advisor of the US said that the President was “disappointed by the shortsighted decision … while the global economy is dealing with the continued negative impact of Putin’s invasion of Ukraine”. He further added that Opec+ decision “will have the most negative impact on lower- and middle-income countries that are already reeling from elevated energy prices”.

Brent Crude to Reach $110 Per Barrel

For the final quarter of the year, banking giant Goldman Sachs has raised its oil price target to $110 per barrel. Following OPEC+’s move to cut production, JPMorgan also suggested that Brent crude could rebound to $100 in the current quarter.

Although Brent Crude price came down from $130 per barrel, Russia’s invasion of Ukraine has tightened supplies. With Western nations sanctioning Russia, the supply dynamics have been shaken. Russia has been offering deep discounts to India and China and has increased its sales to these countries. The RAC’s fuel spokesperson, Simon Williams, said:

“Such a deep oil production cut will inevitably see oil prices rise, forcing up the wholesale cost of fuel. The question is when, and to what extent, retailers choose to pass these increased costs on at their forecourts. Despite three straight months of pump prices coming down, we believe that in many cases drivers are being charged more to fill up today than they should be based on average wholesale prices over the last few weeks.”

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Bhushan Akolkar

Bhushan is a FinTech enthusiast and holds a good flair in understanding financial markets. His interest in economics and finance draw his attention towards the new emerging Blockchain Technology and Cryptocurrency markets. He is continuously in a learning process and keeps himself motivated by sharing his acquired knowledge. In free time he reads thriller fictions novels and sometimes explore his culinary skills.

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