/ world today news/ The decision of OPEC+, which was secret until its announcement, to seriously reduce production, shocked the West. The cartel itself explains its unexpected decision with the fact that the world economy is on the verge of a new crisis. And OPEC+ does not want to fall behind, as in 2008. However, there is another important reason – this is the confrontation between the US and Saudi Arabia. What’s next for oil?
OPEC+ surprised everyone with an unexpected decision to cut production beyond the current cut of 2 million barrels per day. The additional reduction will be 1.657 million barrels per day. Saudi Arabia and Russia will each cut 500,000 barrels.
Back in March, Russia voluntarily reduced production by such a volume, but then it was for one month, now, as part of the OPEC+ decision, the reduction in Russian production will be valid until the end of 2023.
“It’s amazing how this time the cartel managed to keep everything secret until the announcement itself. For the world market and for the US, of course, this was a shock,” said Igor Yushkov, an expert from the Financial University of the Government of the Russian Federation and the National Energy Security Fund.
The surprise effect worked. “Brent” immediately reacted and increased in price by 5%, or $4, and this is most likely not the limit. On the other hand, the US expressed its dissatisfaction with this behavior of OPEC. They consider the reduction in oil production now undesirable.
This decision shows how Saudi Arabia is beginning to lead a more independent policy, as it perfectly understands the reaction of Washington.
“OPEC countries take this decision as a response to the actions of the US and the EU, which raise refinancing rates, thereby slowing the economy and reducing the need for fuel. In addition, the US Federal Reserve’s interest rate hike reduces the flow of money to stock markets and reduces demand for commodities, including oil futures. So that the price of fuel does not fall below 60 dollars per barrel, oil players limit production,” said Yushkov.
In addition, the US had decided not to start buying oil for storage in the country’s strategic reserves, despite the drop in oil prices. That is, the US did everything to keep prices falling. “Against the already high tension in relations between the countries, this step may force the kingdom to act independently,” believes Igor Galaktionov, an expert on the stock market.
The Saudis themselves explained their decision by the need to prevent a drop in oil prices amid the threat of a global economic recession, so as not to repeat the mistake of 2008, when OPEC postponed it for a long time and then could no longer cope with the consequences .
“Obviously, the global crisis is on the horizon and the sudden decision of OPEC+ only confirms this. There are now various claims that the banking crisis in the US and Europe will develop into a global financial and economic crisis. OPEC+ is apparently anticipating just that, so production will be cut. Otherwise, the surplus on the market will sharply reduce prices and hit the incomes of the producing countries,” says analyst Artyom Deev.
Rising oil prices will lead to higher fuel prices in the US, and this is a sensitive time for Americans. The White House has worked so hard to make sure gas prices don’t go up, and now it’s all going down the drain again. At the same time, the active car season is already starting in the USA, and the elections are approaching – in 2024.
All of this could lead to another spike in inflation in both the US and the European Union, which is teetering on the edge in terms of energy. Last year, against the backdrop of rising fuel prices in these countries, inflation was at a record high. To combat this, central banks raised interest rates sharply, which began to slow economic growth. And now everything can come full circle. “A new wave of fuel price increases will once again raise inflation rates, which have been declining for the past six months. This means that the period of higher interest rates in the US and European economies may last longer than expected, increasing the likelihood of a recession. And periods of recession have historically led to a decline in oil consumption,” says analyst Alexander Potavin.
“We can probably expect a response from the US, which may again propose the creation of some kind of buyer’s union that has been talked about for almost 20 years,” says Deev. We’re talking about the No-OPEC anti-cartel bill, which gives the US Department of Justice the power to prosecute OPEC members for antitrust violations.
What’s next for oil prices? The US Energy Information Administration expected an oil surplus of about 0.4-0.5 million barrels per day in the second half of the year.
“The OPEC+ cut reverses that forecast and leaves a deficit of 1 million barrels per day. This is a big change that can have a significant impact on prices,” says Galaktionov. “Brent could add about $5-10 per barrel and rise to 90-95 per barrel from the average forecast price before the OPEC+ news and provided the US does not start new sales of oil from storage,” he believes the expert.
Experts believe that OPEC+ is still only trying to keep the price at an adequate level so as not to fall to 70-60 dollars. Everyone – both sellers and buyers – would be happy with a price on the order of 90 dollars per barrel. Thus, exporters’ incomes remain high and buyers can afford to buy oil. It is important not to kill demand with too high prices, which is well understood in OPEC+. Therefore, if “Brent” suddenly starts to cost more than 95 dollars per barrel this year, then OPEC+ may decide to increase its production to stabilize quotations, admits Alexander Potavin.
It is important for Russia that oil prices in the world remain stable and that the Russian “Ural” does not fall below 45 dollars, as this is important for the budget. “As for Russian companies, we believe they will also benefit from higher global prices,” Galaktionov says.
Translation: V. Sergeev
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