Surprise oil production cuts by Saudi Arabia and other nations affiliated with the OPEC+ syndicate pushed crude futures higher to start the week. The curbs marked a significant departure from rhetoric surrounding a meeting between Saudi and Russian delegates in mid-March, suggesting that OPEC+ was committed to its current output levels through the end of the year. Russia had previously announced that it would be unilaterally reducing its own output by 500,000 barrels per day (bpd) through June, but will now extend those cuts through the end of the year. Cumulative production cuts from OPEC+ nations are now equivalent to more than 3.6 million bpd.
The US energy sector lacks the agility it had attained before the COVID-19 pandemic and can no longer respond quickly to OPEC+’s influence on global oil markets. Moreover, its emergency stockpile of crude oil is already at 40-year lows, which leaves the western world with few good options to continue suppressing crude prices. This will complicate US efforts to reduce domestic inflation through monetary policy.
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Over the weekend, the Organization of Petroleum Exporting Countries (OPEC) launched a surprise output cut, with Saudi Arabia, the United Arab Emirates, Iraq, Algeria, Kuwait, and Gabon all decreasing output by a cumulative 1.039 million barrels per day (bpd). Oman and Kazakhstan, cooperating nations outside of OPEC (known as OPEC+ states), topped off those cuts with plans to idle an additional 118,000 bpd of output.
Combined with an ongoing reduction of Russia’s supply, worth 500,000 bpd, as well as earlier curbs of 2 million bpd announced late last year, the OPEC+ syndicate will have reduced their crude oil production targets by roughly 3.657 million bpd through the month of May. According to Reuters calculations, that is equivalent to roughly to 3.7% of global demand. Following the news, prices of international benchmark Brent crude surged by more than 6.0% on Sunday night and into Monday morning, crossing the $85.00 per barrel mark for the first time in nearly a month.
The initiation of output cuts marks a stark reversal of OPEC+ delegates’ messaging in mid-March, which suggested Russia and Saudi Arabia were committed to the group’s current output policy until year-end. While there are obvious economic ambitions at play here, this shock to energy markets could very well be intentional and meant to send a geopolitical message as well. As MRP previously noted that OPEC+’s influence over energy markets has grown significantly since the outbreak of COVID-19.
Prior to the pandemic, OPEC+ would avoid overly aggressive output cuts because US producers could quickly backstop production levels and ultimately leverage massive shale capacity to win a greater market share away from the syndicate. However, with US field production still 900,000 bpd under previous peak production levels, and the US oil and gas industry now hollowed out by more than 100 bankruptcies that occurred in 2020 alone, there is a much smaller threat of the US being able to counter OPEC+ influence in the international market. COVID’s North American energy destruction has…
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