The group of the largest oil producing nations (OPEC+) agreed on Thursday to deepen the voluntary oil production cuts, taking total reductions to 2.2 million barrels per day (bpd) till early 2024.
Both the benchmark global oil prices settled 2% lower this week, partly because the production cuts were voluntary and the investors anticipated additional supply cuts ahead of the OPEC+ meeting.
Russia, Saudi Arabia and other significant members of OPEC+, who pump out nearly 40% of the global oil supply, met in an online meeting to discuss the future supply policy. Here, Saudi Arabia proposed to deepen the production cuts further.
Christyan Malek, an analyst at JP Morgan said that, “the market reaction expresses a disbelief in the full efficacy of the cuts. However, setting a new framework for each member to deliver on its cut reflects the degree of cohesion and trust among the members.”
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Understanding Production Cuts with Numbers
In the meeting on Thursday, OPEC+ discussed oil production targets for the next year amid forecasts that they will potentially face a surplus in the oil markets, the group decided to further deepen the voluntary production cuts.
The group’s output of some 43 million barrels per day (bpd) already reflects the voluntary cuts of 5 million bpd to support prices and stabilize the market. This includes a 1 million bpd production cut by Saudi Arabia that is about to end next month.
Out of these 5 million bpd production cuts, 2.2 million comes directly from eight big producers forming the OPEC nations. This figure includes a 1.3 million production cut extended by Russia and Saudi Arabia only.
The remaining 900,000 bpd of cuts, includes 200,000 bpd of fuel exports redactions pledged by Russia which will include crude oil and by-products, as announced by the Russian Deputy prime Minister. With the rest being divided among six other members.
The UAE announced that it had agreed to voluntarily reduce the production by 163,000 bpd; while Iraq would contribute an additional 220,000 bpd in the first quarter of 2024. Kuwait, Algeria and Kazakhstan were among the seven member groups that decided on unwinding oil cuts gradually after the first quarter.
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The Motive Behind Oil Cuts
The real motive behind the voluntary cuts agreed by the OPEC+ nations is to reduce the supply of oil in the market which would result in stabilizing the oil prices that are on a downfall since late September, and concerns over a weaker economic growth in 2024, further reducing the demand.
As per the expectations, the International Energy Agency (IEA), forecasted a slowdown in oil demand in 2024. This comes as “the last phase of the pandemic economic rebound dissipates and as advancing energy efficiency gains, expanding electric vehicle fleets and structural factors reassert themselves.”
In a major move, OPEC+ has also invited Brazil, the top 10 oil producing country to join the group, which is hoping to join the group by January.
