Oil Prices to Rise Again as Producers Cut Output

Time: 2023-04-14 09:47

Why did oil producers suddenly announce big cuts in oil production in April?
How much does their strained relationship with the United States matter?
Where will the international oil price go next?
IAN asks for more details.

First, the reason why oil producing countries unexpectedly announced production cuts
On April 2, 2023, OPEC+ announced that it would cut production by more than 1.6 million barrels per day, starting in May and lasting until the end of 2023. There are four reasons for the cut.
1, in response to the US delay in replenishing its strategic crude oil reserve. At the same time, after the conflict between Russia and Ukraine, the relationship between OPEC+ Alliance and Europe and the United States becomes more complicated, and political factors play a bigger role in the adjustment of OPEC+ output. This production cut also highlights the opposition between OPEC+ and the United States and Europe.
In 2022, energy prices are rising rapidly, and the United States wants the Saudis to pump more oil to curb inflation. However, in October 2022, OPEC+ announced that it would cut production by 2 million barrels a day. The United States was very unhappy, accusing the move of siding with Russia.
The United States has released oil from the Strategic Petroleum Reserve several times since 2022 in response to high oil prices. The United States had previously assured Saudi Arabia that it would replenish the war reserves if prices fell. But when the price of oil did fall, the Saudis were not pleased when the Biden administration said outright that there would be no replenishment of the Strategic Petroleum Reserve in the near future. So OPEC+ has no choice but to cut production in response to the US backtracking and to show its opposite position.
2. In mid-March 2023, the European and American banking crisis (refer to the previous Silicon Valley Bank article for details) broke out successively, leading to the selling of crude oil, and the price of crude oil fell sharply in a short time. Oil producers are very concerned about potential future financial market risks and that continued downward pressure on the economy could push oil prices below support levels. OPEC+ 's existing "insurance policy" (reducing supply and raising prices) is not enough to deal with this potential pressure, so it will have to cut production further. The cut is seen as a precautionary measure, with OPEC+ taking a pre-emptive approach to any demand weakness that might result from the banking crisis.
In March, the Credit Suisse crisis broke out (refer to the previous article on Credit Suisse for details), and the Swiss government directly skipped the vote of the general meeting of shareholders. Finally, Swiss Bank acquired 90% shares of Credit Suisse with 3 billion Swiss francs. In November 2022, Saudi Arabia invested 1.4 billion Swiss francs to acquire 9.9% of Credit Suisse's shares. After the acquisition, Saudi Arabia's shares shrank to 300 million Swiss francs, resulting in a huge loss of profits. Therefore, the OPEC+ alliance led by Saudi Arabia responded to the challenge of the western world by cutting production.
4. Oil producers and oil companies posted record profits in the first quarter of 2022 and 2023, as the huge profits brought by high international oil prices prompted OPEC+ to increase production cuts again.

Second, what are the subsequent effects of oil producers' production cuts?
1. Higher Oil prices: The most immediate consequence of reducing the supply of crude oil is higher oil prices. That would raise the cost of oil in big consuming countries, putting further strain on their already shaky economies.
2. Oil Producers earn more: Oil producers earn more when oil prices rise.
3. Increased demand for oil alternatives: The global supply of oil will decrease, which will change the supply and demand relationship in the oil market. Big oil consumers are likely to consume less oil, and they will demand more of some alternative energy sources.

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