Some of the world’s largest oil exporters shocked markets over the weekend by announcing that they would cut oil production by more than 1.6 million barrels a day.
OPEC+, an alliance between the Organization of the Petroleum Exporting Countries (OPEC) and a group of non-OPEC oil-producing countries, including Russia, Mexico, and Kazakhstan, said on Sunday that the cuts would start in May, running through the end of the year. The news sent both Brent crude futures — the global oil benchmark — and WTI — the US benchmark — up about 6% in trading Monday.
OPEC+ was formed in 2016 to coordinate and regulate oil production and stabilize global oil prices. Its members produce about 40% of the world’s crude oil and have a significant impact on the global economy.
What it means for Putin: OPEC+’s decision to cut oil production could have big implications for Russia.
After Russia invaded Ukraine last year, the United States and United Kingdom immediately stopped purchasing oil from the country. The European Union also stopped importing Russian oil that was sent by sea.
Members of the G7 — an organization of leaders from some of the world’s largest economies: Canada, France, Germany, Italy, Japan, the United Kingdom and the United States — have also imposed a price cap of $60 per barrel on oil exported by Russia, keeping the country’s revenues artificially low. If oil prices continue to rise, some analysts have speculated that the US and other western nations may have to loosen that price cap.
US Treasury Secretary Janet Yellen said Monday that the changes could lead to reassessing the price cap — though not yet. “Of course, that’s something that, if we’ve decided that it’s appropriate to revisit, could be changed, but I don’t see that that’s appropriate at this time,” she told reporters.
“I don’t know that this is significant enough to have any impact on the appropriate level of the price cap,” she added.
Russia also recently announced that it would lower its oil production by 500,000 barrels per day until the end of this year.
Just last week Putin admitted that western sanctions could deal a blow to Russia’s economy.
“The illegitimate restrictions imposed on the Russian economy may indeed have a negative impact on it in the medium term,” Putin said in televised remarks Wednesday reported by state news agency TASS.
Putin said Russia’s economy had been growing since July, thanks in part to stronger ties with “countries of the East and South,” likely referring to China and some African countries.
Russia, China and Saudi Arabia: The OPEC+ announcement came as a surprise this week. The group had already announced it would cut two million barrels a day in October of 2022 and Saudi Arabia previously said its production quotas would stay the same through the end of the year.
“The move to reduce supply is fairly odd,” wrote Warren Patterson, head of commodities strategy at ING in a note Monday.
“Oil prices have partly recovered from the turmoil seen in financial markets following developments in the banking sector,” he wrote. “Meanwhile, oil fundamentals are expected to tighten as we move through the year. Prior to these cuts, we were already expecting the oil market to see a fairly sizable deficit over the second half or 2023. Clearly, this will be even larger now.”
Saudi Arabia stated that the cut is a “precautionary measure aimed at supporting the stability of the oil market,” but Patterson says it will likely “lead to further volatility in the market,” later this year as less available oil will add to inflationary feats.
Still, the changes signal shifting global alliances with Russia, China and Saudi Arabia around oil prices, said analysts at ClearView Energy Partners. Higher-priced oil could help Russia pay for its war on Ukraine and also boosts revenue in Saudi Arabia.
The White House, meanwhile, has spoken out against OPEC’s decision. “We don’t think cuts are advisable at this moment given market uncertainty – and we’ve made that clear,” National Security Council spokesman John Kirby said Monday.
