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The first OPEC+ oil supply cut in more than a year shows the group is serious about managing global crude markets and willing to take preemptive action, said group leader Saudi Arabia.
“This decision is an expression of will that we will use all of the tools in our kit,” Saudi Energy Minister Prince Abdulaziz bin Salman said in an interview on Monday, after OPEC+ agreed to cut 100,000 barrels a day in October. “The simple tweak shows that we will be attentive, preemptive and pro-active in terms of supporting the stability and the efficient functioning of the market to the benefit of market participants and the industry.”
The cutback came as a surprise for many traders, who had expected the Organization of Petroleum Exporting Countries and its partners to hold production steady as oil prices above $90 a barrel squeeze consumers. The market also looks set to get even tighter in the coming months as the EU imposes sanctions on Russian exports.
Yet OPEC+ also faces a market where concerns about the strength of demand have started to outweigh supply fears. Crude futures have lost about 20% in the past three months on the threat of a global economic slowdown, imperiling the windfall enjoyed this year by the Saudis and their partners.
China, the biggest oil importer, has exhibited signs of an “alarming” economic slowdown, with apparent consumption sinking 9.7% in July to a two-year low amid weaker business activity and harsh Covid-19 curbs. Meanwhile, the US has skirted close to recession and pursued stricter monetary policy.
The output cut is “intended to send the signal that OPEC+ is back into a price-watch mode,” said Bill Farren-Price, head of macro oil and gas research at Enverus. The group may think this move “will be enough to deter any short-sellers.”
Oil rose, with Brent crude climbing as much as 4.3% to $96.99 a barrel, before settling at $95.74 in London. OPEC members Kuwait and Iraq issued expressions of support for the decision.
Analysts had predicted that the cartel would hold output steady in October, after increasing by 100,000 barrels a day this month in response to entreaties from US President Joe Biden. The decision on Monday exactly reverses the September hike.
Biden “has been clear that energy supply should meet demand to support economic growth and lower prices for American consumers and consumers around the world,” the White House said in a statement after the OPEC+ decision. The president “is determined to continue to take every step necessary to shore up energy supplies and lower energy prices,” it added, noting the US’s release of emergency oil stockpiles.
Prince Abdulaziz had already given an indication that a policy move was coming. Two weeks ago, he said that a lack of liquidity meant futures prices had grown too volatile, and were divorced from the realities of physical supply and demand. The best method of restoring equilibrium might be an output reduction, he said, a proposal that was widely backed by other members.
OPEC+ also faces the possibility of higher supplies from fellow member Iran, which remains locked in negotiations to revive a nuclear accord and remove US sanctions on its petroleum sales. A successful agreement could add more than 1 million barrels a day onto world markets, according to the International Energy Agency, but there’s still some work to be done before that could happen.
The October cut will be first time the kingdom has curtailed production since early 2021, and the first such reversal for the wider OPEC+ alliance since the massive output curbs announced at the outset of the Covid-19 pandemic in April 2020. The alliance has spent most of the past two years gradually feeding idle oil production back into the post-pandemic market.
(Updates oil price in seventh paragraph.)
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