A preemptive move by OPEC+

While the global economy is on tenterhooks amid fears over what the future might bring, the members of OPEC’s Joint Ministerial Monitoring Committee have reaffirmed their commitment to the Declaration of Cooperation, which extends to the end of 2023[1].

It emerged last week that some OPEC+ countries were planning voluntary oil production cuts in addition to those agreed in October. The voluntary cuts, which start in May and last until the end of the year, were announced by Saudi Arabia (500,000 b/d), Iraq (211,000 b/d), the UAE (144,000 b/d), Kuwait (128,000 b/d), Kazakhstan (78,000 b/d), Algeria (48,000 b/d), Oman (40,000 b/d) and Gabon (8,000 b/d). Russia had earlier said it would trim its oil output by 500,000 b/d (see Fig. 1). Taking into account the earlier pledges of 2 million b/d, this brings the total volume of cuts to 3.66 million b/d, or 3.7% of global demand[2].

This move has sent ripples through the market, with Brent crude on Monday making the biggest leap in more than 12 months (up nearly 6.5% from the previous trading day), having topped $84 a barrel for the first time since early March (see Fig. 2), while WTI settled up 6.3%, at $80.4 a barrel.

The news of the upcoming production cuts has prompted rating agencies and investment banks to revise their forecasts. Goldman Sachs, for example, has raised its price forecast for Brent for December 2023 by as much as $5, to $95 a barrel. The bank estimates that the output reduction can provide a 7% boost to oil prices[3].

OPEC says its decision is “a precautionary measure aimed at supporting the stability of the oil market.”[4] And the cartel has good grounds for concern, as the recent banking turmoil in Europe and the US could trigger a broader financial crisis, which will send oil demand plummeting. OPEC’s decision could have also been driven by the growing level of OECD commercial oil stocks, which stood at 2.802 billion barrels this January, up 34.9 million barrels from a month earlier[5].

The market is now waiting for the reaction from Western countries. There is a possibility that NOPEC, the anti-OPEC bill, will be revived and passed into law. In return, OPEC nations could abandon the petrodollar altogether. Note that alternative currencies have lately been gaining traction in global trade, with CNOOC and TotalEnergies completing the first LNG deal in yuan,[6] while contracts for Russia’s crude supplies to India are now settled in non-dollar currencies.[7]