OPEC’s Decision is a New Risk for the Global Economy

The Organization of the Petroleum Exporting Countries (OPEC) and its allies announced, ahead of an official meeting, that they will reduce production by another 1.16 million barrels per day following a price drop under pressure from fears of a banking crisis. This means that OPEC+ will have reduced production by 3.66 million barrels per day from May until the end of the year, according to Reuters calculations, which corresponds to 3.7 percent of global demand.

This decision has caught analysts off guard who expected the group to confirm the October plan to reduce production by two million barrels per day by the end of 2023, and they consider this decision a new risk for the global economy.

Saudi Arabia, OPEC’s largest producer, plans to cut production by 500,000 barrels per day to support stability in the oil market, the energy ministry reported. Iraq plans to reduce production by 211,000 barrels per day, according to an official statement. The United Arab Emirates will be putting 144,000 barrels per day less on the market than before, and Kuwait 128,000 barrels. Oman has decided to exclude 40,000 barrels per day from the market, and Algeria 48,000 barrels. Kazakhstan is also reducing production by 78,000 barrels per day. Russian Deputy Prime Minister Alexander Novak stated that Moscow will extend the planned production cut by 500,000 barrels per day until the end of the year. Moscow made this decision back in February after the West imposed a price cap on its oil.

The G7 and its allies, including the EU, have capped the price of Russian barrels at $60 to limit Moscow’s financial capacity to fund its invasion of Ukraine. Insurers and carriers have been threatened with sanctions if they service more expensive Russian oil.

Significant Reduction

This is a significant reduction for a market where, despite recent price fluctuations, supply appeared to be reduced in the second half of the year. Oil futures prices jumped as much as 8 percent in New York on Monday, further increasing inflationary pressures that could force central banks around the world to keep interest rates higher for longer, Bloomberg reports.

– OPEC+ clearly wants a higher price – says Gary Ross, oil consultant and manager of the hedge fund Black Gold Investors LLC.

The surprising move could reignite tensions between the U.S. and its regional partner Saudi Arabia, whose relationship with President Joe Biden’s administration has been strained. The White House stated that the new production cuts are reckless and that from July there will be about 1.6 million barrels per day less crude oil on the market than previously expected.

From Riyadh, it was stated that the cuts are ‘precautionary measures aimed at supporting the stability of the oil market.’ Relations between Saudi Arabia and the U.S. have been strained since last year when the White House urged the kingdom to ‘pump’ more oil, which famously failed.