(London) Oil prices jumped on Monday the day after the surprise announcement by several major exporting countries of a drastic reduction in their production from May, in order to bring prices back up after the recent fall.
In total, eight of the 23 members of OPEC, which brings together the Organization of the Petroleum Exporting Countries (OPEC) and its partners, are concerned, with Saudi Arabia in first place.
The alliance, which held a technical meeting via videoconference (JMMC) on Monday, took note of these “voluntary adjustments” in production. In unison with its members, it assured that it was “a precautionary measure aimed at supporting the stability of the oil market”.
But for analysts, it is above all a question of garnering additional “revenues”, commented in a note Jorge Leon, of Rystad Energy.
These cuts show that OPEC will do anything to “defend a floor price well above $80 a barrel,” he said, heedless of criticism from the United States and other consumer countries, worried about runaway inflation.
Crude prices fell to a two-year low in March, “an unacceptable level for OPEC members,” UAE-based oil market expert Ibrahim al-Ghitani told AFP.
They had been hurt by the banking crisis in the United States, which drove investors away from commodities and other riskier, more volatile assets.
After this concerted action by the big producers of black gold, the market reaction was immediate: the two global benchmarks took off by around 8% at the start of the session, returning to their level before the tumults in the banking sector.
Around 9 a.m. (Eastern Time), Brent North Sea, Europe’s benchmark for crude, climbed 5.77% to $84.50 a barrel, and its US equivalent, WTI, jumped 5. 70% to $79.98 a barrel.
Iraq, Algeria, Saudi Arabia, the United Arab Emirates, Oman, Kazakhstan, Kuwait and Gabon will therefore make significant reductions from next month until the end of 2023. They range from 500,000 barrels per day (bpd) for Riyadh to 8,000 bpd for Libreville.
Moscow, for its part, has extended its 500,000 bpd reduction measure until the end of 2023.
In total, the volume left underground will be “approximately 1.66 million barrels daily,” OPEC said.
“Most of the cuts will be made by countries producing at or above quotas” set, implying “real supply cuts” and market tightening, DNB analysts pointed out.
Other countries could also “announce their own cuts if they deem it […] necessary”, according to Deputy Prime Minister for Energy Alexander Novak, interviewed by Russian television Rossiya 24.
And unlike similar measures taken by OPEC in the face of the pandemic or fears of recession, this time global demand for oil is increasing.
China, the country greediest in black gold, is indeed reopening its economy after having folded in on itself during the COVID-19 pandemic.
This announcement comes on top of what had already been decided in October, namely a drop in volume of two million bpd. This was the largest reduction since the emergence of COVID-19.
This is a new setback for Washington, which pleads for an opening of the black gold taps in order to contain prices, estimates Caroline Bain, of Capital Economics.
From a geopolitical point of view, these reductions further demonstrate “the group’s support for Russia”, which will thus benefit from better prices to offset the impact of Western sanctions.
The Kremlin on Monday defended a decision taken “in the interest” of the world market, to keep prices “at the right level”, according to Russian presidential spokesman Dmitry Peskov. “Whether other countries are happy or not is their business,” he told reporters.
