OPEC+, which includes the countries of the Organization of the Petroleum Exporting Countries in addition to Russia and a few other states, took everyone by surprise when it announced in early April a sudden drop in its production of around 1, 5 million barrels/day from May.
It is still too early to gauge the effect of this decision on prices at the pump. But, on the eve of the summer season, this announcement should theoretically add additional pressure.
Note that this decrease in production follows the 2 million barrels/day decrease announced last October. In a few months, it is therefore more than 3% of world oil production that has been cut off in total, in a market that is already considered to be tight.
Washington’s reaction was negative. The government of the world’s largest producer of black gold has blasted these decisions, which risk driving up energy prices and, in doing so, putting upward pressure on inflation even as attempts are made to suppress it. This latest decision by OPEC+ surprised the energy community, but is nevertheless easily understood. This organization is made up of countries whose national budget is highly dependent on oil prices.
The share of black gold in Saudi Arabia’s exports has climbed to almost 80% in 2022 while hydrocarbon sales provide Russia with around 45% of its revenue. Moscow needs this additional income if it wants to support its war effort in Ukraine…
The year 2022 has been prosperous for these OPEC+ countries, which control half of world production. Oil prices hovered around $100 a barrel, providing them with bumper revenue. They would like the situation to continue. However, lately, prices have fallen around $70 a barrel. The announced reduction in supply of 1.5 million barrels/day is therefore clearly aimed at raising these prices to between $80 and $90, or even beyond.
Avoid the stampede
These producing countries also wish to avoid the pitfalls of recent history. In 2008-2009, in the wake of the financial crisis, oil prices plummeted dramatically, falling in a matter of weeks from $135 to $40 a barrel. With the difficulties that the banks have recently experienced in Europe and the United States, and with economic indicators in the red, including the difficulties in the real estate sector, it is clear that the producing countries want to avoid a stampede of equal magnitude thanks to preventive measures.
Finally, the OPEC+ countries face less direct competition from American producers. The latter have always been very responsive to the market, with rapid increases in their production to take advantage of contexts of rising oil prices. However, despite high prices in 2022, the Americans have not significantly increased their production. It is that their shareholders, following the difficult years of COVID-19, have asked to be remunerated by dividends rather than using the additional income to invest in production. Much to the chagrin of US President Joe Biden, who had to dip into stocks of the Strategic Petroleum Reserve in order to inject record quantities into the market (more than 200 million barrels in 2022) with the aim of mitigating soaring prices at the pump.
Over the next few weeks, the price of a barrel of oil and gasoline will essentially depend on the health of the global economy and the strength of energy consumption in China.
The latter experienced a historic decline in 2022 thanks to its containment policy. A rapid recovery in its oil consumption will certainly raise the price of a barrel. The reaction of consumers and motorists to rising prices at the pump will also play a role. Who knows if, faced with an economy with uncertain contours, they will decide to change their vacation plans by opting for less distant trips, for example? We will see more clearly shortly, with the return of sunny days.