OPEC+, the global consortium of oil-producing nations, has proved once again its unmatched influence over energy markets, even if the organization’s actions could mean another surge in inflation worldwide.
Oil-producing allied nations including Saudi Arabia, Iraq, and the United Arab Emirates announced Sunday they would cut oil production by almost 1.2 million barrels of crude daily between May and the end of the year. Also on Sunday, Russian Deputy Prime Minister Alexander Novak announced his country would extend its own production cuts, which began last month, through to the end of 2023 as well.
Combined with existing production cuts, the move will reduce global oil supply by nearly 1.7 million barrels a day, or around 1% of the 100 million barrels of current daily global production.
A dozen oil-producing countries’ ability to remove that much oil from the market almost overnight is what OPEC and OPEC+ were designed to do: facilitate cooperation between oil-rich countries and maximize profits. But the organization’s influence is rarely welcome to non-OPEC+ countries that rely on their oil.
“OPEC’s pricing power is higher than it has ever been, and they are going to continue to exercise that power,” Jeff Currie, an economist and global head of commodities research at Goldman Sachs, told CNBC Monday.
The oil production cut threatens to hike fuel and gasoline prices in the U.S., which have been a bright spot in the inflation narrative since costs began falling steeply last summer. Gasoline prices surged early last year owing to the Russian invasion of Ukraine and disrupted global oil and natural gas markets. While U.S. crude oil prices are still nowhere near the $130 a barrel heights hit last spring, prices did rise to $80.12 on Monday, a more than $5 climb from Friday.
U.S. gasoline prices, while still far below last year’s highs, were rising for days before the production cuts were announced, according to AAA, largely resulting from rising demand.
OPEC’s profit game
Currie said part of the reason behind OPEC+’s strong pricing power right now is that the rest of the world has underinvested in oil production, which “provides much larger market power, and [OPEC+] are exercising that market power.”
In response to last year’s surging oil prices, the White House in March authorized large releases from the U.S. Strategic Petroleum Reserve to increase supply, but the emergency storages are now dwindling. Energy Secretary Jennifer Granholm said last week that it could take years to refill the reserves, adding that the government would likely begin buying back oil from companies to refill the reserve later this year.
But despite concerns over U.S. energy security and pleas from the Biden administration, companies have been reluctant to increase domestic production since last year, with some oil CEOs suggesting that the country’s production capacity has already hit its limit.
It adds up to an ideal scenario for OPEC+ countries to cut global energy supply to increase profits, according to Currie.
“This is a revenue-maximizing decision for OPEC under all the different scenarios,” he said.
Cutting oil production is a frequent strategy for countries dealing with declining energy profits such as OPEC+ member Russia, where despite increasing oil exports to China, crippled oil trade with Europe and Western sanctions have caused oil production to decline at its fastest rate since the 1990s. Saudi Arabia’s production cuts are also likely to be seen by the U.S. as a flex of its power. Since last year, the U.S. has urged the Saudis to increase production and further squeeze Russia’s prime source of revenue by lowering global oil prices.
While the production cuts might lead to higher pump prices globally, they may be temporary, as both Russia and OPEC countries said they were taking a cautious view on the market’s future. OPEC noted in a statement that the production cuts were a “precautionary measure aimed at supporting the stability of the oil market.” Similarly, Novak, the Russian deputy prime minister, said the extension to oil cuts were “responsible and preemptive actions,” according to a statement reported by TASS, a Russian state–owned news agency.
But some experts have also argued that the production cuts may not noticeably increase inflation after all. One reason may be that demand for oil is weaker than markets are pricing in, Ed Morse, global head of commodities research at Citigroup, said in a March interview with CNBC, adding that demand would shrink regardless as an economic slowdown looms.
Others have said that an increase in non-OPEC+ oil production along with other sources could offset a production cut. “A lot of our energy, at least in the near term, is not going up,” economist and Wharton professor Jeremy Siegel told CNBC Monday, citing low natural gas prices, which could offset higher oil prices. “Natural gas today, which by the way is more important for heating and electricity generation, actually bumped to new lows,” he said.
A group of oil-producing non-OPEC+ countries—led by the United States, Brazil, Norway, Canada, and Guyana—are also forecast to lead oil supply growth this year, according to the International Energy Agency, and will pump a record-breaking additional 1.2 million barrels per day for the year.
