The price of Brent crude oil surged above $84 per barrel after several of the world’s largest oil exporters announced surprise cuts in production. Saudi Arabia, Iraq, and several Gulf states announced that they were reducing their output by more than one million barrels of oil per day. In addition, Russia has decided to extend its cut of half a million barrels per day until the end of the year. This move has caused energy giants BP and Shell’s share prices to rise by more than 4%. The sudden increase in oil prices could potentially put more pressure on inflation, which was already driven up by high energy and fuel prices last year.
Despite the increase in oil prices, rising oil prices may not necessarily lead to higher household energy bills. Yael Selfin, the chief economist at KPMG, stated that the energy price cap, which households benefit from, has already been determined using earlier market expectations. Moreover, household energy use tends to be more gas-heavy than oil, reducing the impact of the price increase on household energy bills. However, Selfin warned that the increase in oil prices could lead to a rise in the price of fuel, which could feed into other costs, resulting in a longer period for inflation to come down.
The Opec+ oil producers, which account for approximately 40% of the world’s crude oil output, are responsible for the reduction in output. Saudi Arabia is reducing output by 500,000 barrels per day, and Iraq is reducing output by 211,000 barrels per day. Other countries making cuts include the UAE, Kuwait, Algeria, and Oman. A Saudi energy ministry official stated that the move was “a precautionary measure aimed at supporting the stability of the oil market.”
The reduction in output by the Opec+ oil producers is significant for several reasons. Despite price fluctuations in recent months, there were concerns that global demand for oil would outstrip supply, especially towards the end of the year. The increase in oil prices following Sunday’s announcement could potentially put more pressure on inflation, worsening the cost-of-living crisis and raising the risk of a recession. Moreover, the announcement came just a day before the Opec+ meeting, where indications from members suggested that they would stick to the same production policy, which is why the announcement came as a surprise. There is a possibility that more members of the group could announce voluntary cuts, putting even more pressure on supplies. The development is also likely to further strain ties between the US and Saudi Arabia-led Opec+.
The Opec+ group includes the Organization of Petroleum Exporting Countries (Opec) and other countries, including Russia. When the Opec+ group announced its production cuts in October 2020, US President Joe Biden said he was “disappointed by the short-sighted decision.” However, Sunday’s announcement underlines the close cooperation between oil-producing countries and Russia. The invasion of Ukraine by Russia in February 2022 sent energy prices soaring over worries about oil supplies. The price of Brent Crude hit a high of close to $130 per barrel at one point.
Nathan Piper, an independent oil analyst, stated that the move by Opec+ appeared to be an attempt to keep the oil price above $80 per barrel in the medium term, given that demand could be hit by a weakening global economy and sanctions have had a “limited impact” on restricting Russian oil supplies. The US National Security Council spokesperson said that “We don’t think cuts are advisable at this moment given market uncertainty – and we’ve made that clear.”
In conclusion, the recent surprise cuts in oil production by the Opec+ oil producers have caused the price of Brent crude oil to surge above $84 per barrel. The increase in oil prices could potentially put more pressure on inflation.
