Oil-producing countries have agreed to continued cuts in production. Image source: GETTY IMAGES
In a concerted effort to bolster declining prices, countries involved in oil production have reached an agreement to extend the implementation of production cuts.
This decision reflects their commitment to stabilize the market and ensure the sustainability of oil prices.
Saudi Arabia, a major player in the oil business, has announced plans to cut output by one million barrels per day (bpd) in July.
Furthermore, the OPEC+ coalition, which controls a substantial portion of the global crude oil market, has agreed to reduce output levels by an extra 1.4 million bpd beginning in 2024.
Given that OPEC+ accounts for roughly 40% of global crude oil output, its choices have a significant impact on oil prices.
The goal of imposing these production cuts is to establish control over the supply of oil and stabilize market prices.
The consequences of OPEC+’s activities can be felt throughout the sector, affecting many stakeholders as well as global oil markets as a whole.
The UK experienced a significant decrease in average diesel prices last month, with a record-breaking drop of 12 pence per litre, as reported by the RAC.
Against the backdrop of declining prices and an excess supply of oil, oil-rich nations convened in a seven-hour-long meeting led by Russia.
The discussions aimed to address the prevailing market conditions and find measures to stabilize the situation.
According to Russian Deputy Prime Minister Alexander Novak, the combined production cuts implemented by OPEC+ since October 2022 have amounted to 3.66 million barrels per day (bpd).
OPEC+ refers to the collaboration between the Organization of Petroleum Exporting Countries and its allied producers.
Prior to this recent meeting, OPEC+ had already agreed to reduce production by two million bpd, which roughly corresponds to around 2% of the global demand for oil.
These concerted efforts by OPEC+ are designed to mitigate the oversupply and restore equilibrium in the oil market.
Mr. Novak said that the outcome of the oil-rich nations’ meetings resulted in the prolongation of the production cut agreement to the end of 2024.
This resolution underscores the participating countries’ continuous commitment to managing the oil market and addressing the difficulties posed by oversupply and fluctuating prices.
By extending the agreement, they hope to provide long-term stability and assistance to the global oil industry.
‘A Saudi lollipop’
OPEC+ unexpectedly decided in April to impose a voluntary production cut of 1.6 million barrels per day (bpd), which went into effect in May.
This approach resulted in a momentary price boost, but it did not result in a sustainable recovery in oil prices.
Saudi Energy Minister Prince Abdulaziz bin Salman recently stated that the one million bpd cut could be extended beyond July if the market demands it.
He referred to the extension as a “Saudi lollipop,” implying that it was intended to stabilize the oil market.
Oil producers are currently confronted with dropping prices and increased market volatility, which has been worsened by Russia’s invasion of Ukraine.
The geopolitical environment complicates and adds unpredictability to the already complex dynamics of the global oil business.
According to Reuters, the West has leveled accusations against OPEC, claiming that the organization manipulates prices and undermines the global economy by maintaining high energy costs.
Additionally, there are allegations that OPEC is aligning itself with Russia, despite the sanctions imposed on Russia following the invasion of Ukraine.
In response to these accusations, insiders within OPEC have stated that the monetary policies implemented by Western countries over the past decade have led to inflation and compelled oil-producing nations to take action to preserve the value of their primary export commodity, oil.
These conflicting perspectives highlight the complex relationship between Western economies and OPEC, with each side attributing the cause of economic challenges to the actions of the other.
The issue of energy costs and their impact on the global economy continues to be a subject of debate and negotiation between OPEC and Western nations.