MC Explains: What’s behind the OPEC+ supply cut that may lift oil prices to $100 per barrel?

Led by Saudi Arabia, Middle-East countries including Iraq, UAE and Kuwait on April 2, announced further supply cuts in addition to the earlier cuts. In October 2022, OPEC had agreed to cut production by 2 million bpd from November till the end of 2023 despite calls of pumping more oil by the US government.

According to the latest announcement, Saudi Arabia has decided to reduce supply by 500,000 bpd while Iraq will cut supply by over 200,000 bpd starting from May 2023 till the end of the year.

Russia, which also comes under OPEC+, said it will continue the production cut it had announced earlier till the end of 2023. The country announced a production cut of 500,000 bpd in February.

Why is it a surprise?

The surprise production cut by OPEC comes after the group stood by its decision of reducing output by 2 million bpd in February 2023 and announced no further cuts.

In its last meeting, OPEC made no recommendations to change the production policy of the group. The market was expecting a similar decision from the group in April as well—to maintain supply cuts at 2 million bpd for the year 2023.

So what changed?

The JMMC (Joint Ministerial Monitoring Committee) meeting on February 1 was a fairly routine affair. But since then, crude oil has witnessed a sharp correction in mid-March leading prices to decline to their lowest in the month since December 2021.

Concerns over stress in the banking sector spilling to other sectors and threats of recession weighed on oil prices. The worries over the banking crisis eased and reflected in oil prices rebounding in the last week or so. But OPEC+ said that its decision to cut supply was to provide more stability to the energy market.

Also Read: Explained: Factors behind the recent drop in crude oil prices

How has the market reacted to the supply cut?

Oil prices surged more than 8 percent at over $83.95 a barrel on April 3 on the news of the supply cut by OPEC. In the last few months, prices have been on a downward trend due to the global banking turmoil and muted demand amid record-high inflation.

In March, US benchmark Brent crude fell to $72 per barrel, the lowest in 15 months, due to the collapse of major global banks including Silicon Valley Bank and Credit Suisse.

However, OPEC had forecast an increase in demand led by China, one of the largest oil consumers in the world, which is opening up after months-long strict Covid-19 lockdowns.

With the recent supply cut and demand recovery in China, oil prices may again surge to the levels of $100 per barrel, last seen in July 2022.

What are the other cues to look out for?

Ministers from OPEC+ countries, known as Joint Ministerial Monitoring Committee, are scheduled to meet on April 3.

The committee is expected to review the compliance of the member countries with its output quota and discuss global oil demand amid a recovery in the Chinese market.

What does it mean for India?

India, which is dependent on imports for 85 percent of its crude oil needs, may end up with a bigger import bill if the prices rise again.

With a lesser supply of oil in the market, India may also face problems with the sourcing of crude oil. However, Russia, one of the largest producers of crude oil, has become one of the biggest suppliers to India since the beginning of the Russia-Ukraine war.

Another blow of higher oil prices could be faced by state-run Oil Marketing Companies (OMCs), which recorded losses in the first half of the current financial year as they kept retail fuel prices unchanged. If prices rise again, consumers in India may not see a reduction in fuel prices as OMCs might not lift the freeze on petrol and diesel prices.

Also Read: Lower crude oil prices aided by global banking turmoil to benefit OMCs