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Reducing oil production means there will be a relative shortage in the supply of the product.
The recent actions by some members of the Organization of Petroleum Exporting Countries (OPEC) and its allies tagged OPEC+ to cut oil production beginning in May can significantly stir a setback for most country’s Central Banks. With Saudi Arabia and its key allies including the United Arab Emirates and Kuwait set to cut production by more than 1 million barrels per day, Russia’s projected 500,000 cuts have taken the number to 1.6 million barrels.
Major oil consumers like the United States are bound to bear the major brunt of the oil cut at a time when it seems the Federal Reserve is winning the fight against inflation. The authorities have condemned the move from the participating 8 OPEC+ members for the planned production cut.
“We don’t think cuts are advisable at this moment, given market uncertainty – and we’ve made that clear,” a spokesperson for the US National Security Council said, Per a Reuters report.
Countries around the world are leaning away from American dependence with Yuan-dominated trades gradually taking the center stage across the board. While there is no major reason stated for the planned production cut, Saudi Arabia said in a statement as reported earlier by Coinspeaker that the measures are to drive stability in the market.
Inflation Effect of the OPEC+ Oil Production Cut
There are a lot of dynamics surrounding the slowdown in production which will further strain the global oil quota as agreed earlier by OPEC as a body.
Reducing oil production means there will be a relative shortage in the supply of the product. With demands rising across countries, this can significantly drive the value of oil higher per its pump price. Based on current projections, chances are that this price will top $100 from the current $80.11 for the West Texas Intermediate (WTI)
In both product and consumption-based economies, a higher oil selling price is also billed to significantly drive the price of items higher. This way, the year-long fight against inflation through consistent and targeted rate hikes will be hampered.
“The anticipated increase in oil prices for the rest of the year as a result of these voluntary cuts could fuel global inflation, prompting a more hawkish stance on interest rate hikes from central banks across the world. That would, however, lower economic growth and reduce oil demand expansion,” said Victor Ponsford of Rystad Energy in a research note.
This will notably not be the worry of the United States alone but for every country still grappling with inflationary growth.
With just a month away from the scheduled plan, chances are that mediation may be resorted to getting these OPEC+ members to change their plans before the end of the year. Such diplomatic missions, however, can be tough as these countries are great allies of Russia with the United States notably accusing these nations of parlaying with the sanctioned country.