Why are OPEC+ countries cutting production?

The OPEC+ group’s cut of 2 million barrels per day in oil production continues to have an impact on oil prices. The barrel price of Brent oil, which was traded at $ 88 last Friday, has held around this level today, after exceeding $ 93 yesterday.

Thus, the barrel price of oil, which fell to $ 82 on September 26, increased by 13.4% in the last 10 days.

After the meeting of the OPEC+ Committee of Ministers yesterday, the group’s daily production limits were cut by 2 million barrels in order to stop the decline in oil prices caused by the weakening global economy. This was the biggest production cut in the last 2 years.

ENERGY IMPACT ON US INFLATION

The decision in question was immediately harshly criticized by the US administration. The White House does not want oil prices to rise for two main reasons. First of all, annual inflation in the USA rose to 8.3 percent in August, and the rise in energy prices had a significant contribution to the rise in inflation. Although fuel prices in the country decreased by 10.6 percent in August, prices increased by 25.6 percent compared to a year ago, well above the general inflation. The US administration is worried that the latest decision taken by OPEC+ countries will put upward pressure on inflation.

IT HAS A SIGNIFICANT SHARE IN RUSSIA’S REVENUES

In addition, energy revenues have a share of approximately 30 percent in Russia’s budget. In June, the price of Brent oil per barrel was over $110, while Russia’s oil revenues reached $20 billion, according to International Energy Agency (IEA) data. In August, while the oil price fell below $100, Russia’s revenues fell to $11 billion. While the USA and its allies impose sanctions on Russia for its attempted invasion of Ukraine, one of the most important goals of these sanctions is to reduce Russia’s energy revenues, thus making it difficult to finance the war. Therefore, steps to increase oil prices are seen as steps taken in favor of Russia.

OPEC PRODUCTION 29.65 MILLION BARREL

Established in 1960, Organization of Petroleum Exporting Countries (OPEC) established the OPEC+ group in 2016 by taking Azerbaijan, Bahrain, Brunei, Kazakhstan, Malaysia, Mexico, Oman, Philippines, Russia, Sudan and South Sudan with it.

According to OPEC’s September oil market report, only the 13-member OPEC group produced 29.65 million barrels of oil per day in August.

August 2022 oil production of OPEC countries (thousand barrels/day):

Among these countries, Saudi Arabia ranked first with a daily production of 10.9 million barrels. Again, according to OPEC data, global oil production rose to 101.3 million barrels per day in August. Global oil production rose by an average of 1.3 million barrels per day in August compared to the previous month. Therefore, the 2 million cut decision taken by OPEC+ countries actually means returning to 3 months ago in production.

UPEC countries realize about 29 percent of global production, while the total share of OPEC+ is 40 percent.

DUE DUE TO CORONAVIRUS

Oil production generally shows an upward trend in normal periods. However, 2 years ago, OPEC+ countries decided to reduce their production by 9 million barrels. The decrease in demand due to the coronavirus pandemic led to this decision.

PRODUCTION INCREASED TO REDUCE THE EFFECTS OF WAR

This year, while the effects of the coronavirus were overcome and oil demand was expected to recover, the war in Ukraine broke out. Due to the invasion attempt by one of the world’s most important energy producers, the price of oil per barrel briefly exceeded 130 dollars in March. While Russia’s oil exports fell due to war and sanctions, OPEC countries gradually increased their production with the initiatives of the USA. They made a commitment to increase daily production by 400 thousand barrels per day, and then by 648 thousand barrels per day.

RECESSION CONCERNS STARTED

However, in the meantime, inflation started to rise globally and central banks around the world, especially the Fed, took up the interest weapon against inflation. As the interest rate hikes came one after another, the concerns about the economic recession started to increase. The IMF and World Bank warned that aggressive increases in developed countries could lead to recession. On the one hand, while production was increased gradually, the recession concerns caused a decrease in oil prices.

DOWN 30 PERCENT COMPARED TO JUNE

Between June 8 and September 26, oil prices fell by about 30 percent. Although the latest production cut decision is based on an agreement between Saudi Arabia and Russia, the decline in prices means loss of income and a decrease in profit margins for all producing countries. So it’s not surprising that manufacturers generally wanted to cut back. Of course, the decrease in prices is of greater importance for Russia.

DEMAND WAS EXPECTED TO BE 100 MILLION BARREL

Again, in the latest OPEC report, it was estimated that the global oil demand would reach an average of 100 million barrels per day in 2022. However, downward revisions to the global economic outlook have raised the expectation that these forecasts will also decrease. Therefore, cutting production of 101 million barrels has become more attractive for OPEC countries despite the pressure of the USA.

RUSSIA IS SELLING BELOW THE MARKET

While Russia’s oil sales to the USA and its allies gradually became impossible due to sanctions, China and India came to the fore in purchases from this country. However, these countries, in a sense, took advantage of the opportunity and bought Russian oil at 20 dollars below the price in the free market as of the end of September. It is not known whether or to what extent these countries will cut their purchases under Western pressure. Therefore, every rise in international oil prices in this process is of great importance for Russia.