Saudi Arabia and other oil monopolists who are members of OPEC+ announced on Sunday that they would cut production sharply, by less than 1.16 million barrels per day. The announcement came on the eve of the organization’s meeting scheduled for Monday, and caught market analysts and government officials around the world by surprise. The US federal government was among the first to respond, saying this was an “not recommended” cut.
Although this organization is no longer expected to increase its production, and go to some extent to save the economies of the world that have witnessed a rise in fuel prices and contributed to the largest rise in inflation in decades, it seems that this announcement was received with surprise and shock in some Western capitals. In addition to the decision itself, it is not customary to make decisions outside the meetings of that entity.
It is feared that this decision will open the door to more inflation. In March, crude oil prices fell to around $72/73 per barrel (Brent, a benchmark for the Portuguese economy), reaching their lowest level since November 2021. With this further cut, prices are expected to rise from the reopening of markets on Monday.
Market analysts interviewed by Reuters estimated that futures contracts could immediately increase by $3 a barrel. The price was already on the rise, having settled around $85, and other analysts cited by the same agency estimated that an immediate rally could reach $10 per barrel.
Another analyst said that OPEC +, which includes Saudi Arabia and other allied producers, as well as Russia, is therefore anticipating a possible drop in demand. and “a precautionary measure aimed at supporting the stability of the oil market.”
The US federal administration sees things differently. Washington maintains that the world needs lower prices to support economic recovery and reduce inflation, a scenario that becomes more difficult if oil supply drops more than it was already in the initial plans for 2023.
“We don’t think these cuts are advisable at this time given the uncertainty in the markets, and we’ve made that very clear,” Reuters quoted a spokesperson for the National Security Council as saying.
These cuts will begin in May and will continue through the end of the year. Iraq, the United Arab Emirates, Algeria, Kuwait, Oman and Kazakhstan all confirmed their respective production cuts, as did Russia, which had already made a unilateral cut in February, when the governments-imposed price cap came into effect. Western countries in response to Russia’s war in Ukraine, and as a way to try to cut back the Kremlin’s oil profits.
The Portuguese government, in its 2023 State Budget Proposal, projected an average price of US$78 per barrel. Recently, Brent has been fluctuating in a rather limited range, between $75 and $90, but some analysts have already warned that the price is under pressure due to the full reopening of the Chinese economy.
Therefore, an increase in prices was already expected in the future, in 2023, even without taking into account this new announcement, which would only exacerbate expectations that were based on the perspective that supply would not reach all demand.
A fundamental change in the price of oil may force many governments to recalculate, because the decline in energy inflation, which was recorded, can change and turn into new price increases.
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