Oil

OPEC+ to cut oil production – The Ticker

OPEC+ announced on Sept. 7 that it will cut production of oil barrels, leading to an increase in oil prices globally.

The energy alliance has decided to cut its production targets by 100,000 barrels per day, sending shock waves across countries as the announcement comes during economic turmoil.

OPEC is a group of 13 nations that export petroleum to other countries, whereas OPEC+ is an alliance that works with but is not formally recognized by OPEC, including Russia as its leading member. OPEC+ groups the world’s most powerful oil producers, who are all together responsible for the production of 40% of the world’s crude oil.

The timing of this decision was not great. Investors and consumers are in fear of continuing troubles with inflation, China’s continuation of coronavirus-related restrictions, the increasing strength of the U.S. dollar, Russia’s weaponization of Europe’s energy supply — especially amid concerns of the winter energy shortage — and a possible recession.

OPEC+ believes that the downward pressure on crude prices and the low cost of gasoline have been exaggerated, especially when faced with a lack of purchases during the COVID-19 pandemic and the resulting economic slowdown.  OPEC+ aims to act in time to protect profits and market stability.

In response to the decision, the international market’s Brent crude oil traded at $95.54, going up 2.5%. The domestic market did not react well either, as West Texas Intermediate crude oil was priced at $89.16 a barrel, going up 2.6%.

To make matters worse, Europe’s gas prices jumped more than 25% on Monday, after Russian energy company Gazprom announced it will not reopen its main gas pipeline to the rest of the continent. Russia also announced the Nord Stream 1 pipeline will not be reopening on schedule due to a technical fault.

These delays were in response to the G-7, a group of seven nations with the world’s most advanced economies. The group put out a statement backing the implementation of a pricecapping mechanism on Russian oil exports, with the goal of combating the high energy prices and lowering oil profit, which both helped Russian President Vladimir Putin fund the country’s war with Ukraine.

The G-7’s strategy will only work to its advantage if the cap doesn’t unintentionally result in barrels being taken off the market. To deter from the group’s plan, Russia announced it would stop selling oil to countries that impose price caps on it.

It is important to note that the price cap has yet to be set.

OPEC+’s announcement rolls back from its decision in August, when it agreed to raise output by 100,000 barrels per day. That decision came following U.S. President Biden’s visit to Saudi Arabia, where he suggested doing so to cool off prices and aid the global economy.

The United States’ response was to do what it takes to bring down prices and that the price cap was a powerful way to fight inflation, thus protecting workers and U.S. businesses.

“President Biden is determined to continue to take every step necessary to shore up energy supplies and lower energy prices,” White House Press Secretary Karine Jean-Pierre said in a statement, as reported by Reuters.

OPEC+  said its current decision is intended only for a month. However, for the coalition’s next meeting on Oct. 5, there are no guarantees of reversing the cut in production.

Considering its production of roughly 28 million barrels per day, OPEC isn’t making a large cut. The fear is that producers won’t consider further cuts to keep prices higher, which will in turn impact investors and consumers.

“The cut was only modest and therefore mostly a form of verbal intervention, sending a signal to the West about OPEC’s ability to influence the market,” Victoria Scholar, the head of investment for Interactive Investor, told Barron’s.

All eyes are now on Iran for hope of a supply boost, if it can secure a renewed version of its 2015 nuclear deal with the United States. If Iran approves limiting its nuclear program, sanctions can be eased, enabling the country to put one million oil barrels per day on the market.

However, that option does not seem possible at the moment. Tensions are rising between the two countries; Iran seized two U.S. naval drones in the Red Sea on Sept. 1, though it released them the following day.

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