Saudi Arabia, Russia and their oil producing allies announced on Sunday that they would cut production by nearly 1.2 million barrels of crude a day, or more than 1 percent of world supplies, in an apparent effort to boost prices.
The move was unexpected because leaders of the group, known collectively as OPEC Plus, had said in recent days that they did not intend to make any changes in their policies. While the announcement was a surprise, its significance may be slight, especially if the global economy slows.
The alliance produced nearly 2 million barrels below its supply target in February, the last month with official output figures. “We expect shortfalls to continue,” said Ha Nguyen, a global oil analyst for S&P Global Commodity Insights.
There have been persistent reports that Russia is struggling to keep up production without the benefit of Western service companies that have wound down their operations since the Russian invasion of Ukraine a year ago. Saudi production has also been below its production quota set by Organization of the Petroleum Exporting Countries in recent months.
Taking up the slack in supplying the 100 million-barrel-a-day global market are Brazil, Canada, Guyana, Norway and the United States. All are increasing their oil production.
Still, the OPEC Plus action has symbolic importance at a time when oil prices have fallen more than a third below levels immediately after Russia’s invasion of Ukraine last February. OPEC Plus members may be responding to growing fears of a recession later this year in the wake of the failure of several American and European banks as well as central bankers’ continued efforts to tame inflation. Oil demand has also been undercut by strikes in France, including at refineries.
Saudi Arabia and Russia will lead in making the announced cuts, with declines of 500,000 barrels each, followed by Iraq, United Arab Emirates and Kuwait. Some analysts said the move could spur more investor speculative interest in oil futures and help drive oil prices higher in coming weeks.
“I really am surprised,” said Tom Kloza, global head of energy analysis at the Oil Price Information Service. Mr. Kloza said he expected that the Brent global oil price benchmark, which has been hovering at $75 to $80 a barrel in recent weeks, would now climb above $80. In recent years, Saudi Arabia, the leader of the group, has appeared determined to lift prices to around $90 a barrel.
The new cuts, which are voluntary and start in May, could be temporary depending on economic conditions.
Just last week, Saudi Aramco, the Saudi state oil company, announced two deals with China to supply refineries there with 690,000 barrels a day. Demand for oil continues to rebound from the global Covid pandemic slowdown. World diesel demand has nearly recovered to the levels of before the pandemic, and jet fuel demand continues to surge as China emerges from its Covid shutdown.
The new cuts come as gasoline prices, still well below a year ago, are rising again. The national average price for regular gasoline on Sunday was $3.51 a gallon, 13 cents above a month ago. The price a year ago was $4.20 a gallon, and was a major factor in the rise of inflation.
The cartel had already agreed last October to output cuts of 2 million barrels a day, but the ultimate reduction was well below that as some producing countries like Libya and Nigeria agreed to cuts to oil levels that they could not reach anyway.
Before last October, the group had last slashed production in 2020 when demand collapsed because of the pandemic. Since then, it had gradually increased production until October.
Clifford Krauss
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