In a surprise announcement, OPEC+ decreased oil production on Sunday—and the result could be a rise in crude oil prices to around $100 per barrel.
Key Details
- The decision surprised many as previous numbers had suggested OPEC+ would need to produce more oil rather than less.
- The International Energy Agency anticipates an energy demand surge later this year, making OPEC+’s decision especially surprising.
- OPEC+ ministers had previously assured consumers that they would hold to previous production target commitments, Bloomberg reports.
- Reducing output coincided with steadily rising prices, making the decision more unexpected.
Why it’s news
OPEC+’s decision to reduce oil output could increase gas prices worldwide. While the output reduction was unexpected, this is not the first time OPEC+ has caught the rest of the world off guard with its output decisions.
The oil-producting group’s decision is likely driven by a struggling global economy and banking instability caused by high interest rates and inflation, Bloomberg reports.
By reducing oil output now, OPEC+ is protecting itself from a true slump if a recession hits the rest of the world, as expected this year. At the same time, it increases the likelihood of a crude oil price increase which could inflame the economic issues much of the world faces.
“OPEC+’s actions are clearly focused on shoring up a market that was looking increasingly weaker,” Citigroup Inc. analysts write in a report. “Given market positioning and short covering, a spike now seems inevitable, but could be followed by realization that the market is a lot weaker than people think.”
After the initial market shock following OPEC+’s announcement, analysts will watch oil inventories as a physical marker of the cut’s effect. Oil stockpiles have been declining in recent weeks. In the U.S., oil stocks have fallen by around 20 million barrels over the last two weeks, Bloomberg reports.
“The move is extremely bullish as draws on inventories will be immediate,” says Pareto Securities analyst Nadia Martin Wiggen. “This cut proves again that OPEC+ is proactive in managing the supply-demand balance and requires $90 to $100 a barrel.”