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OPEC's Cutback Prompts Market Shockwaves

Most of the oil-producing countries are currently holding back in production. On Sunday (4/2), OPEC+ launched a statement cutting its output by over 1 million barrels of crude oil a day. As a result, oil prices soared by 7% in the market. The main reason for OPEC’s sharp cut is believed to stimulate the cost of oil. Previously, OPEC had already cut production by 2 million barrels a day last October. Following this, the alliance also failed to achieve its projected oil output in February. Ha Nguyen, a global oil analyst for S&P Global Commodity Insights, confirmed the seamless production decline by stating that shortfalls are expected to remain throughout the period. However, some argue it will not necessarily have a notable impact if the economy slows down. OPEC members have also moved on to making their first moves in the new policy. Russia and Saudi Arabia act as the first countries to initiate the cut; each has reduced 500,000 barrels in oil production. The policy would also help Russia, as they struggled to produce post-Ukraine War. While the majority of OPEC+ participants concur, The United States disagrees with the call. The surge in crude oil cost will come along with gasoline prices, which will make the expected price to be set high. Adding to the U.S. concern is the increasing summer demand creating another fuel cost factor. Last year, fuel prices significantly affected U.S Inflation; thus heading back to $4-$5 a gallon would stir economic challenges.

The announcement by OPEC to reduce its oil production by more than 1 million barrels per day has reverberated through the market, causing uncertainty and uplifting tensions with Western allies. Saudi Arabia and Russia, OPEC's largest members, undertake the operation with the determination to sustain the oil price or drive it higher. According to analysts, OPEC+ has expressed a strong desire to establish a minimum oil price of US$80 per barrel, whereas UBS and Rystad anticipate a resurgence to US$100. Brent crude, the global benchmark used by oil markets, had almost reached US$80 per barrel last week, reaching a level comparable to its trading range for a significant portion of 2023. In addition, according to OPEC, the unexpected reduction in oil production is a decisive action taken to uphold the stability of the oil market and discipline those who speculated on a decline in oil prices. The strained relations with Washington also influenced the decision, which had deemed the latest action inadvisable. Moreover, OPEC may be concerned about the possibility of a recession due to indications of lower-than-expected oil demand, especially in developed nations, during the initial months of this year. Although the intention was to bolster the constancy of the oil market, the move has generated market turbulence, notably in the United States. Nevertheless, the group has called the cuts a "precautionary measure" to maintain stability in the oil market.

OPEC+ supplies about 60% of the world's petroleum trade, allied producers such as Russia included, and has some of the best information on global supply and demand. Yet, the surprise decision came two weeks after reiterating expectations for a 2.32 million barrel per day increase in world demand this year on China's easing of its zero-COVID-19 policy. According to the U.S. Energy Department, Crude oil accounts for more than half the price of producing gasoline. On Monday (4/3), global oil prices rose more than 6% in response to the news. The recent increase in international oil prices may only be the start of the counter-reaction in response to the information as not only that, but U.S. gasoline prices have also increased from last month alone. High global fuel demand has been stretching crude oil supplies. John Auers, the managing director of Refined Fuels Analytics, a fuel advisory firm, pointed out that oil is the major raw material used in the production of gasoline. According to statistics, the United States was able to produce 12.5 million barrels per day (bpd) of oil in January. Despite that, the U.S. also consumes around 20.28 million barrels a day, so it remains a net importer, although U.S. imports of foreign petroleum have been down since the peak in 2005. Other side effects regarding the spike in global oil prices also affect the U.S. dollar, as changes in oil prices can impact the U.S. dollar's value. Higher oil prices may cause an increase in the trade deficit and inflation, resulting in a decline in demand for the U.S. dollar. Conversely, lower oil prices may boost demand for the U.S. dollar.




The New York Times

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