OPEC Cuts: $100 Oil, Big Inflation Impact Ahead?

By Published On: April 4, 2023Categories: Daily Market News & Insights

Over the weekend, the market received a shock that launched prices higher, leading to $5/bbl crude gains. The oil cartel OPEC agreed to cut production by an additional 1.15 million barrels, which will run from May through the end of 2023. Crude oil is trading at its highest level since January, and analysts are once again talking about $100/bbl of crude oil this year. Some economists believe the cuts could push fuel prices 50 cents higher in the months to come. Today, we’ll explore what happened, why OPEC chose to make the cuts, and what it means for fuel markets and the economy.


What Happened

OPEC’s cuts of 1.15 million barrels comes on top of their previous cuts, bringing the total daily production curtailment to 3.66 million barrels per day. The most recent cuts include just eight members of OPEC+, including Saudi Arabia, Iraq, the U.A.E., Kuwait, Algeria, Kazakhstan, Oman, and Gabon. Saudi Arabia will slash half a million barrels per day from their output. Iraq comes in second with 211 kbpd cuts, while the U.A.E. is cutting the third-most production. Russia also announced intentions to maintain their voluntary 500-kbpd cuts, though those reductions are sanctions-driven.

OPEC+, which consists of OPEC’s 13 member countries along with 10 other non-OPEC countries, have been collectively cutting output since April 2020, when cratering oil demand and falling prices forced Saudi Arabia and Russia to broker a deal among major oil producers to balance the market. Since 2020, the OPEC+ group has continued cuts, evaluating production levels monthly and making periodic adjustments. In October, the group announced surprise cuts of 2 million barrels per day, which will continue in addition to the recent 1.15 MMbpd cuts.


Why Did OPEC+ Cut Production?

The group announced they would be adding a “voluntary reduction” on Sunday, with Saudi Arabia describing the action as a “precautionary measure” aimed at stabilizing oil markets. Brent Crude, the international index monitored closely by OPEC, fell near $70/bbl in March, though the index is trading closer to $85 following OPEC’s announcement. Although China’s economy is causing global demand to rise, OPEC appears concerned with the overall economic outlook and wants to preempt any drop in demand.

Of course, OPEC doesn’t face much downside with the decision. In the past, OPEC has faced stiff competition from the US and Russia, which could take market share if OPEC lowered its output. Now, US production is constrained by financial pressures on oil companies, while Russian supply is subject to sanctions. Goldman Sachs estimates that OPEC will be able to collect higher revenue, with the lost production more than offset by rising crude prices.

The US choosing not to refill the Strategic Petroleum Reserve may have also factored into OPEC’s decisions. Months ago, the Biden Administration announced plans to refill the SPR when oil prices fell below $70. When prices hit that level in March, though, the administration did not take action to refill the SPR, citing maintenance issues. The SPR refill in 2023-24 was expected to keep steady pressure on demand, keeping markets higher. Without it, OPEC felt the need to fill in the imbalance by cutting supply.


What Does This Mean for Oil Prices and the Economy?

In the short-term, we’ve already seen a hefty uplift in crude prices. Brent and WTI crude rose by roughly $5/bbl overnight, though fuel prices remained steady. Reuters noted that the 5.6% leap in Brent crude prices was the biggest one-day jump since April 2022. Long-term, projections show that prices could rise further.

Various forecasters have predicted rising crude prices in light of the cuts. Rystad Energy believes oil will trade above $100 for the remainder of the year, reaching $110 this summer. UBS sees Brent hitting $100 by June. Goldman Sachs, noting the inability for other producers to fill the gap, raised its Dec ’23 forecast by $5/bbl to $95.

On the fuel end, ClearView Energy Partners was quoted saying that fuel prices could rise 50 cents per gallon this summer due to the supply outage, more than the typical 30 cent rise during the summer. AAA expects rising crude prices to trickle down to fuel prices over the next two weeks, even though the short-term response has been limited.

From an economic standpoint, the decision will likely continue fueling inflation by pushing energy costs higher. Rising oil prices make the cost of everything more expensive, since nearly every product is transported by ship, plane, train, or truck. Higher inflation means the Federal Reserve will continue their aggressive rate hikes to try and tame higher prices, putting dampeners on the economy.

Overall, OPEC’s decision to cut supply will likely mean notably higher prices this year given the market’s inability to fill the gap. In turn, higher prices will put additional stress on the already fragile global economy, creating even more volatility in the future.

This article is part of Daily Market News & Insights


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