OPEC production cuts could have wide economic impact

Over the weekend, OPEC+, the cartel that includes the biggest oil-producing nations in the world, announced production cuts of 1.1 million barrels.

Over the weekend, OPEC+, the cartel that includes the biggest oil-producing nations in the world, announced production cuts of 1.1 million barrels.

In a statement, the Saudi Energy Ministry said the decision was a “precautionary measure” aimed at “supporting the stability of the oil market”. Saudi Arabia is OPEC’s biggest oil producer, averaging a production of 11.5 million barrels per day in 2022.

OPEC’s recent announcement adds to the voluntary adjustment by Russia of 500 thousand barrels per day until the end of 2023 and production cuts of 2 million barrels a day already announced in October last year.

This news may have come as a surprise to some investors and blindsided the market, with initial sentiment seeming to indicate demand would pick up, particularly as air and road traffic returns to pre-pandemic levels.

As a result, this drove oil markets higher with crude oil futures up as much as 8% after the news. Brent crude finished up 4.8% for the day on Monday while the local share market also rallied, with the ASX 200 jumping to a three-week high before closing 0.6% higher, settling at 7223.

The OPEC+ supply cuts will have obvious and massive implications for the oil market, particularly for demand. In the short run, at least, the cuts seem to indicate an expected decrease in demand. This could, in part, be due to oil prices hitting a 15-month low in March, of close to $70 a barrel. As such, it seems that OPEC’s production cuts could be seen as a bearish outlook for global oil demand.

Not only that, the OPEC+ production cuts could have a wider economic impact, globally.

With Australia (and many other countries including the U.S. and the U.K.) seeing sustained interest rate hikes to combat high inflation, the resulting pressure now put on oil prices doesn’t come at an ideal time for the global economy.

This is in addition to a banking sector that is already under pressure, after the Silicon Valley Bank collapse and the Credit Suisse acquisition by UBS.

As such, OPEC’s production costs could have given Central Banks around the world an extra consideration when making Monetary Policy decisions going forward.

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