Brent crude oil prices surged above $84 a barrel on Monday, rising more than 5% in response to an unexpected announcement from OPEC+ oil producers that they would be cutting output by more than one million barrels of oil per day. This move was made by Saudi Arabia, Iraq, and several Gulf states, and was followed by Russia’s announcement that it would extend its cut of half a million barrels per day until the end of the year. As a result, energy giants BP and Shell both saw their share prices rise by more than 4%.
The increase in oil prices follows a period of stability, which saw prices return to levels seen before Russia’s invasion of Ukraine. However, the US has been calling for producers to increase output in order to push energy prices lower. Last year’s high energy and fuel prices helped to drive up inflation rates, putting pressure on many households’ finances.
While the oil price surge could make the battle to bring down inflation harder, rising oil prices won’t necessarily lead to higher household energy bills. The energy price cap, which households benefit from, has already been determined using earlier market expectations. Additionally, household energy use tends to be more gas-heavy than oil-heavy. The biggest impact will be on transport costs, as a rise in fuel prices could feed into other costs, making it harder for inflation to come down.
Members of the OPEC+ oil producers account for around 40% of all the world’s crude oil output. The group is reducing output by 500,000 barrels per day in Saudi Arabia and 211,000 barrels per day in Iraq. The UAE, Kuwait, Algeria, and Oman are also making cuts. According to a Saudi energy ministry official, the reduction in output is “a precautionary measure aimed at supporting the stability of the oil market.”
Nathan Piper, an independent oil analyst, told the BBC that the move by OPEC+ appeared to be an attempt to keep the oil price above $80 a barrel in the medium term, given that demand could be hit by a weakening global economy and sanctions have had a “limited impact” on restricting Russian oil supplies. There were concerns that global demand for oil would outstrip supply, especially towards the end of the year, despite price fluctuations in recent months. The increase in oil prices following Sunday’s announcement could potentially put more pressure on inflation, worsening the cost-of-living crisis and raising the risk of recession.
The announcement comes just a day before the OPEC+ meeting, and it was a huge surprise to many, given that indications from members suggested that they would stick to the same production policy, which meant no fresh cuts. There is a possibility that more members of the group could announce voluntary cuts, squeezing supplies even more. The move is likely to further strain ties between the US and Saudi Arabia-led OPEC+, with the White House calling on the group to increase supplies to cool down prices and check Russian finances.
In conclusion, the surprise move by OPEC+ to cut output has caused oil prices to surge, with Brent crude oil trading above $84 a barrel. The reduction in output is being made by members of the OPEC+ oil producers, and it could potentially put more pressure on inflation, worsening the cost-of-living crisis and raising the risk of recession. However, the cut is seen as a precautionary measure aimed at supporting the stability of the oil market, given the possibility that demand could be hit by a weakening global economy and sanctions that have had a limited impact on restricting Russian oil supplies.
