Oil Prices Surge After OPEC Reduces Output by Millions of Barrels

After OPEC surprised markets by reducing output by more than a million barrels per day, oil prices jumped by more than 8 percent today. The inflationary effects of a rising oil price and their influence on interest rates are a more pressing concern.

A day after OPEC members announced substantial production cuts, sending oil prices soaring and drawing criticism from U.S. officials, Saudi Arabia's status as the group's leader and a mighty force in the oil market was reaffirmed.

Crude prices rose as traders anticipated the start of production reductions equivalent to over 1% of global output, or over 1.1 million barrels per day, beginning in the next month. The price of Brent crude, the international standard, increased by over 6%, reaching nearly $84.93 per barrel. The price of a barrel of the U.S. benchmark crude, West Texas Intermediate, rose to over $80.

The unexpected announcement on Sunday posed a challenge to the Biden administration, which has been working to bring down the cost of gasoline, and has signaled a potential new threat to global efforts to bring inflation under control.

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In light of the current state of the market, we do not believe it would be prudent to make any production cuts at this time. A spokesman for the National Security Council named John F. Kirby stated that "we made that point crystal clear." "But in addition to that, we do not have a place at that table."

In Riyadh the previous year, President Biden made a special appeal to Saudi Crown Prince Mohammed bin Salman to increase oil production. However, at the next meeting of OPEC, or the Organization of Petroleum Exporting Countries, they decided to reduce their output. Even though Mr. Kirby stated that the White House was informed of the reduction in force in advance, the move could potentially worsen the tense relations between the United States and Saudi Arabia.

The Organization of the Petroleum Exporting Countries (OPEC) issued a statement on Monday that referred to the "voluntary production adjustments" as a "precautionary measure aimed at supporting the stability of the oil market."

Saudi Arabia, the largest oil producer in OPEC, announced that it would reduce its output by 500,000 barrels per day, followed by Iraq (211,000 barrels), the United Arab Emirates (144,000 barrels), and five other countries.

According to several industry analysts, Saudi Arabia's sudden action demonstrated that the country is resolved to take proactive measures to maintain high prices, possibly in the $90 per barrel range.

According to Karen Young, a senior fellow at the Columbia University Center on Global Energy Policy, "This is a new style of unpredictable maneuvering on the part of the Saudi government." Officials from the Saudi Arabian oil industry have recently indicated that current production levels will be maintained through the end of the year.

However, suppose there is a falling demand for oil. In that case, it may be difficult to maintain current price levels. "Could be followed by the realization that the market is a lot weaker than people think," wrote Edward Morse, head of commodities at Citigroup. "Monday's jolt could be followed by realizing that the market is much weaker than people think."

The state of the global economy is fraught with unpredictability. It is unclear how quickly China, the world's largest importer of oil and Saudi Arabia's most important customer, will recover from its "zero Covid" lockdowns. China is the only country that imports more oil than the United States. It is also difficult to estimate the magnitude of the economic damage that the recent turmoil in the banking industry has caused to the demand for oil. Additionally, higher prices will encourage additional investment and production from other producers, such as oil drillers in the United States who work with shale oil.

In recent weeks, consumers have noticed a gradual increase in the cost of a gallon of gasoline in the United States.

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Some analysts believe that the Saudis are sending a message that they would rather act now rather than wait and see how these trends develop in the future by taking this action.

Mr. Morse stated that it was likely that this would not be their final production move of the year.

OPEC Plus, which includes Russia and a few other countries, produces approximately half of the world's oil. As a direct reaction to Western sanctions, which have caused a significant shift in the demand for Russia's oil, Russia announced in February that it would reduce production by 500,000 barrels per day.

In general, a gathering of the organization's oil ministers had not been planned until June, but the Saudis appear to have decided that immediate action is required. Prices have been falling over the past few weeks, despite a slight recovery in recent days as a result of an apparent improvement in the situation in the banking sector. Last week, some oil supplies were disrupted due to a dispute between Iraq and Kurdistan; however, an announcement regarding a potential settlement was made over the weekend.

Oil revenues must be high for Saudi Arabia to fund its ambitious development plans to wean the economy off of oil. The Saudis were likely unnerved when they saw prices falling toward $70 a barrel in the middle of March. Analysts believe that they may have decided to take action to stabilize the market before additional negative news drove prices even lower.

Some analysts believe that the Saudis had little choice but to take action.

"This move by OPEC Plus looks to restore its credibility as being a proactive, pre-emptive force," said Gary Ross, chief executive of Black Gold Investors, a trading firm.

It is abundantly clear that the Saudis will almost certainly take actions that they believe to be in their best interests, regardless of whether or not these actions will aggravate the administration of President Biden or cause complications for the United States.

The growing presence of China in the region, including its role as a mediator in a recent series of secret talks that resulted in a rapprochement between Saudi Arabia and Iran, has complicated already tense relations between the US government in Washington and the Saudi government in Riyadh.

On Monday, Mr. Kirby, the spokesperson for the National Security Council, warned against putting too much stock in the most recent disagreement.

What he had to say indicated that Saudi Arabia continues to be a strategic partner, just as it has been for the previous 80 years. "We don't always see eye to eye on everything, but on many things that are of mutual concern to us, we are finding ways to work together," he said, pointing out the efforts that are being made to extend the cease-fire in Yemen.

However, Helima Croft, an analyst at RBC Capital Markets, found that people in Riyadh had a very different mentality than those in other cities. In a letter to the company's clients, she stated that "it has been apparent that Saudi Arabia is prepared to endure increased friction in the bilateral relationship" with the United States capital.

According to Ms. Croft, the Saudis no longer consider the United States to be their most important ally, as they formerly did because they now consider the United States to be "just one of several partners."

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                       What OPEC's output cut means for the energy market