The Organisation of Petroleum Exporting Countries and its allies (OPEC+) led by Saudi Arabia and Russia agreed earlier this week to extend voluntary oil output cuts of 2.2 million barrels per day into the second quarter or mid-2024.
Saudi Arabia, the de facto leader of the OPEC cartel, said it would extend its voluntary cut of one million barrels per day (bpd) through the end of June, leaving its output at around nine million bpd –well below its capacity of 12 million bpd.
Russia, which leads OPEC allies collectively known as OPEC+, will cut oil production and exports by an extra 471,000 bpd in the second quarter. Russian Deputy Prime Minister Alexander Novak gave new figures showing that cuts from production will make up a rising proportion of the measure.
Oil has found support in 2024 from rising geopolitical tensions and Houthi attacks on Red Sea shipping, although concern about economic growth has weighed. While OPEC+ was widely expected to keep the cuts in place, Russia’s announcement could bolster prices further.
Why did OPEC+ extend oil output cuts to mid-2024?
-Boost crude oil prices: The oil supply cuts first announced in 2023 as part of an agreement among oil producers to boost prices following economic uncertainty. The plan to extend cuts to mid-2024 comes on top of previous cuts to both oil output and exports as some of the world’s largest energy producers drive to push up market rates.
-Support market stability: An energy ministry source told Saudi Press Agency (SPA) that Riyadh will extend its voluntary cut of one million bpd, which was implemented in July 2023, until the end of the second quarter of 2024. “Afterwards, in order to support market stability, these additional cut volumes will be returned gradually subject to market conditions,” said the report.
Additionally, Russia’s Deputy Prime Minister Alexander Novak also said, “In order to maintain market stability, these additional cuts will be gradually restored depending on market conditions,” after the end of the second quarter.
The extension was announced on the same day Russia said it would cut its production by almost half a million barrels in the second quarter of 2024. Saudi Arabia first announced its voluntary cut after the OPEC meeting in June 2023.
The measures for both countries are in addition to a 500,000 bpd reduction announced in April 2023, which runs until the end of 2024. UAE, Kuwait, Iraq and Kazakhstan followed suit, saying they would extend existing voluntarily cuts till the end of June.
The OPEC oil alliance of 22 nations has implemented supply cuts of more than five million bpd since the end of 2022. Russia’s invasion of Ukraine in 2022 sent oil prices soaring to $140, raising earnings across the industry.
The Western nations such as US and UK has tried to target Moscow’s energy exports under sanctions imposed over the Kremlin’s offensive in Ukraine, forcing Russia to ramp up supplies to countries like China and India.
‘’The underlying bias in oil market still looks positive amid supply issues through the red sea, middle east tensions and OPEC+ producers decision to roll-over the output cuts to next quarter, but any sharp up move remains capped amid rise in the Non-OPEC supply and slower demand,” said Pranav Mer, Vice President, EBG – Commodity & Currency Research, JM Financial Services Ltd.
Oil Prices Today
Oil prices climbed about two per cent on Wednesday, March 6, on a smaller-than-expected build in US crude inventories, a big withdrawal from distillate and gasoline stockpiles and remarks by the US Federal Reserve chair Jerome Powell that he still expects US interest rate cuts this year. Lower interest rates could increase demand for oil by boosting economic growth.
Brent futures rose $1.65, or two per cent, to $83.69 a barrel. US West Texas Intermediate (WTI) crude rose $2.07, or 2.7 per cent, to $80.22. Brent was on track for its first daily rise in five days, according to news agency Reuters.
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