Hoor Asrar is not surprised by an escalation in Soaring oil prices
The world is already in the grip of Soaring oil prices and unprecedented inflation that has refused to go away and is causing widespread jitters. To add to the woes is the escalation that soared after top producers unveiled a shock output cut of more than a million barrels. The decision by the Organisation of the Petroleum Exporting Countries OPEC+ which has other top non-OPEC oil-exporting nations, fanned concerns about a fresh spike in prices that could put pressure on central banks to push interest rates higher. Both main crude contracts jumped almost six per cent at one point following the cut by Saudi Arabia, Iraq, the United Arab Emirates, Kuwait, Algeria and Oman, which was the biggest since the group slashed two million barrels per day in October. It came on top of a Russian decision to extend a cut of 500,000 barrels per day despite American calls to increase production but the oil cartel emphasised that this is a precautionary measure aimed at supporting the stability of the oil market. With this increase in prices the oil has become the main topic of discussion in international markets and the focus has shifted towards the oil-producing cartel and many analysts see some kind of impending instability.
Crude prices have come down over the past year as concerns about a possible recession caused by higher borrowing costs have offset supply worries sparked by sanctions on Russia over its invasion of Ukraine. The production cut, coming at a time of an uncertain global demand environment clearly shows OPEC was not happy with the movement in the oil price which had fallen over recent months. Analysts said the decision could deal a blow to markets which had rallied in recent weeks on optimism that the recent banking sector turmoil could force the US Federal Reserve to end its rate hike drive sooner than expected. For equity investors, this could be a rude awakening as markets imply a Goldilocks outlook of reduced discount rates but no recession. The OPEC+ production cut is another reminder that the inflation genie is not back in the bottle but still the mood on Asian trading floors was upbeat with most markets tracking a strong rally on Wall Street. Shanghai, Sydney, Singapore, Manila and Jakarta all rose though Hong Kong dipped and so did Seoul and Wellington. Tokyo rose despite the Bank of Japan’s closely watched Tankan survey showing confidence among the country’s largest manufacturers falling to its lowest level in more than two years.
Russia is a major player in oil markets and justifying the output cuts it declared this action to be in the interests of global markets. Whether other countries are happy with this or not is their business indicating that the decision could anger the United States which had already criticised the OPEC+ oil cartel, led by Saudi Arabia and Russia, over a previous cut in production last year. Riyadh and other major oil producers announced a production cut of more than one million barrels per day calling it a precautionary move aimed at stabilising the market. Russia said it would extend until the end of the year its own voluntary production cut of 500,000 barrels per day, a measure seen by experts as a way of making prices go up and counteracting the effect of international sanctions. Russia added that the measure was justified by the high volatility and uncertainty in the oil market and that the predictability of the global oil market is a key element to ensure energy security. Consequently, oil prices shot up with both main crude contracts jumping around eight per cent at one point.
The escalation in prices was triggered by the announcement made by Saudi Arabia and other OPEC+ oil producers that cut oil output further to the tune of around 1.16 million barrels per day (bpd) in a surprise move that analysts said would cause an immediate rise in prices and the United States called inadvisable. The pledges bring the total volume of cuts by OPEC+, which groups the Organisation of Petroleum Exporting Countries with Russia and other allies, to 3.66 million bpd, equal to 3.7 per cent of global demand. This development came a day before a virtual meeting of an OPEC+ ministerial panel which includes Saudi Arabia and Russia and which had been expected to stick to two million bpd of cuts already in place until the end of this year. Oil prices last month fell towards $70 a barrel, the lowest in 15 months, on concern that a global banking crisis would hit demand. Still, further action by OPEC+ to support the market was not expected after sources downplayed this prospect and crude recovered towards $80. The latest reductions could lift oil prices by $10 per barrel and may make the commodity not only dearer by sparser.
Top oil producer Saudi Arabia said it would cut output by 500,000 bpd with its energy ministry stating that the country’s voluntary reduction was a precautionary measure aimed at supporting the stability of the oil market adding that is taking pre-emptive steps in case of any possible demand reduction. Last October, OPEC+ had agreed to an output cut of two million bpd from November until the end of the year, a move that angered Washington as tighter supply boosts oil prices. The US has argued that the world needs lower prices to support economic growth and prevent Russian President Vladimir Putin from earning more revenue to fund the Ukraine war. The Biden administration said it sees the move announced by the producers as unwise. The voluntary cuts start next month and last until the end of the year. Iraq will reduce its production by 211,000 bpd with the UAE cutting production by 144,000 bpd, Kuwait cutting 128,000 bpd while Oman announced a cut of 40,000 bpd and Algeria said it would cut its output by 48,000 bpd. Kazakhstan will also cut output by 78,000 bpd. Russia would extend a voluntary cut of 500,000 bpd until the end of the year and Moscow announced those cuts unilaterally in February following the introduction of Western price caps. It was also reported that Gabon would make a voluntary cut of 8,000 bpd and not all OPEC+ members were joining the move as some are already pumping well below agreed levels due to a lack of production capacity. After Russia’s unilateral reductions, American perception was that Russia’s alliance with other OPEC members was weakening but this move showed the cooperation is still strong.
Amidst the output cuts, OPEC raised its world oil demand forecast for 2023 after top consumer China lifted its zero-Covid policy. The Saudi-led oil cartel expects demand to grow by 2.3 million barrels per day to an average of 101.87 million barrels per day this year. This is 100,000 a day more than the previous estimate, which was already above pre-Covid levels. It is pointed out that the key to oil demand growth in 2023 will be the return of China from its mandated mobility restrictions and the effect this will have on the country, the region and the world. After almost three years of stringent health restrictions, Beijing in December abruptly ended the zero-Covid policy that had battered the economy and caused widespread protests. World oil demand jumped to 101.17 million barrels per day in the last three months of 2022, compared to 100.79 mbd in the same period before the pandemic in 2019. TW