The recent surprise decision from OPEC+ to maintain its current oil production cuts has sent shockwaves through the industry. As the world begins to recover from the COVID-19 pandemic, many were anticipating an increase in oil production to meet rising demand. Instead, the group of oil-producing nations announced that it would keep its cuts in place, sending oil prices soaring. So, what factors are at play in this decision? In this article, we’ll explore the various economic and political considerations that led OPEC+ to make this unexpected move.
The surprise announcement made by OPEC+ regarding production cuts appears to have been driven by several factors. One contributing factor is the dissatisfaction of OPEC+ with the current price of oil, which has been fluctuating between $70 to $80 per barrel, with the Saudis particularly unhappy about it. Crown Prince Mohammed bin Salman is investing billions in Vision 2030, a strategic plan to diversify the Saudi economy away from energy, requiring oil prices to remain at a certain level.
Another motivation could be to shield OPEC+ from a possible economic downturn, as intensified fears have stemmed from the recent turmoil in banking markets (which the Saudis themselves contributed to). A third factor is likely to be the irritation of the Saudis at recent comments from the Biden administration, which had drawn down crude from its Strategic Petroleum Reserve (SPR) without replenishing it.
Related to this, a fourth factor is geopolitics, with the Saudis wanting to remind the White House that the US is not as influential in the Gulf region and the Middle East as it has been in the past. Moscow appears to have no say in the decision, with Saudi Arabia and a few others in the OPEC+ group calling the shots.
The consequences of this move are clear: oil prices could rise, with some forecasting that crude could trade at $90 a barrel, and others predicting it could go as high as $100. This could make it harder for central banks worldwide to cope with the consequences of higher inflation, potentially leading to interest rates remaining high for longer periods, ultimately affecting global GDP growth.
In conclusion, the surprise move by OPEC+ to extend their oil production cuts is a significant one, and it has taken many by surprise. The factors at play are numerous, and they highlight the complex nature of the oil industry and the delicate balance that must be struck between supply and demand. From uncertainty around the global economic recovery to the ongoing impact of the COVID-19 pandemic, there are many factors that have contributed to this decision. However, it remains to be seen how effective these cuts will be in stabilizing oil prices in the long term, and whether OPEC+ will continue to make similar decisions in the future. As the world continues to grapple with the economic fallout of the pandemic, the oil industry will undoubtedly face further challenges, and it will be fascinating to see how these develop over time.
