OPEC+ Production Cut Shifts Markets

The latest collective decision taken by the Organization of the Petroleum Exporting Countries and allied nations (OPEC+) may have surprised many traders in the global energy markets. In an effort to achieve price stability, the cartel announced Sunday that beginning in May, Oil (CL) output will be reduced. 

OPEC+’s Surprise

Officially, the organisation, which counts 23 member countries, was not expected to hold its next summit until June 4th, 2023. While the OPEC+ Joint Ministerial Monitoring Committee convened on Monday, April 3rd, as it does bimonthly, it only has the power to make recommendations or request that a general ministerial meeting be held.

Therefore, it may have come as a surprise to savvy market watchers that the cartel moved to make such deep production reductions only a matter of months after the cuts made in October of last year. While those cuts have been described by some analysts as ‘paper cuts’, given that many OPEC+ nations were already producing below quota, this week’s reductions have the potential to impact global Oil output in a more direct fashion.

In sum, beginning in May, total output will be cut by more than 3.6 million barrels a day. This number can be reached when Sunday’s announcements are added to those decoded upon in October as well as the Russian Federation’s 500,000 barrel per day reduction in production in response to sanctions from the West.

Saudi Decision-Making

While representatives of Saudi Arabia have publicly stated that the agreement to cut output had been reached in order to preserve the market’s stability, some have raised the question of whether recent comments made by representatives of the United States government may have influenced the cartel’s calculus.

On March 23rd, 2023, American Energy Secretary Jennifer Granholm stated that refilling the U.S.’ Strategic Petroleum Reserve may turn out to be complicated. While on the face of it, recent relatively low Oil prices could provide the U.S. a golden opportunity to replenish reserves following last year’s Biden-directed 180 million barrel sale, issues regarding energy security as well as maintenance work being conducted at two Strategic Petroleum Reserve sites are pushing the American government to push back purchases until later this year.

According to certain reports, Saudi policymakers were none too happy to learn of the U.S.’ stated policy direction, and this discontent could have directly led to the decision to implement further production cuts last Sunday. Yet another reason that OPEC+ may have moved to cut production earlier than predicted could have been lower production from American sources, which reduces the risk of OPEC+ countries losing market share. (Source:Market Watch)

Oil & Related Shares Shift

In response to OPEC+’s production cuts, the global Oil market has been seeing strong shifts over the course of recent trading days. Crude has been on a general uptrend since March 20th, but this week’s price movements have been especially drastic as it rose by 7.2% since March 31st.

International benchmark Brent Oil (EB) has also been enjoying renewed momentum, rising 7.1% over the same time period. Looking forward, some analysts posit that black gold’s price per barrel could continue to rise due to the twin factors of strong demand and production cuts, with Brent possibly even reaching the triple digits. 

These latest shifts on the global Commodities markets could exert further pressure on the pocketbooks of consumers still reeling from stubbornly high inflation rates. While prices paid at the pump across the United States are unlikely to reach the levels seen in summer 2022, the cost to fill up could continue to rise through the summer.

Stocks Shift

This week’s price jumps have not been limited to the Commodities sector. Oil-associated shares have also seen benefits to their bottom lines.

Texas-based ExxonMobil (XOM) rose by just under 6% by the ring of the closing bell yesterday, while BP (BP-L) and Marathon Oil (MRO) have shown increases in stock value of 4.3% and nearly 10% respectively.

Whether the momentum seen on energy markets so far this week can be sustained over the medium-term remains to be seen; many factors may affect the future trajectory of Commodities and related Stocks, and their interplay can be hard to predict.