Oil Prices Rise as OPEC+ Agrees to Further Production Cuts

Oil prices have risen after OPEC+ agreed to further production cuts of 1.16 million barrels per day starting in May 2023. The move aims to stabilize the oil market amid concerns over global economic growth and demand. The cuts are expected to take effect in May and will be in place until the end of 2023.

The decision was made at the latest OPEC+ meeting, where the group sought to address the market imbalance and support prices. The production cuts come as the global economy faces headwinds, with concerns over a potential recession weighing on oil demand. OPEC+ has stated that the cuts will be "returned gradually subject to market conditions" after the second quarter.

Russia, which is part of the OPEC+ group, has pledged to deepen its crude operation cuts in the second quarter of 2023 but has kept the number of its inactive oil wells nearly flat by the end of March, according to Bloomberg. Meanwhile, OPEC's February crude production increased, which was a negative factor for oil prices as some members continued to pump above their quotas.

Crude oil and gasoline prices have risen moderately, supported by expectations of the OPEC+ cuts and disruptions to Middle Eastern crude supplies due to attacks by Houthi rebels. The ongoing conflict between Israel and Hamas, as well as Ukrainian drone attacks on Russian refineries, have also contributed to the price support. However, weaker-than-expected U.S. economic data, including higher unemployment claims and a decline in the Chicago PMI, have limited the price gains.

Why this matters: The OPEC+ production cuts and supply disruptions are the key drivers behind the rise in oil prices, which could impact global economic growth and inflation. The move also highlights the ongoing geopolitical tensions in the Middle East and their potential impact on the oil market.

The Middle East geopolitics, particularly the tensions between Israel and Iran, are dominating the market narrative for oil, with the potential for a military conflict between the two countries posing a significant risk to global oil supply and trade flows. While China's oil demand growth is expected to slow, the global macroeconomic outlook is somewhat positive, with S&P Global revising its 2024 global growth forecast upwards. OPEC's continued market management strategy is expected to provide fundamental support for Brent crude prices above $80 per barrel for the remainder of 2024.

Key Takeaways

• OPEC+ agreed to cut oil production by 1.16 million barrels per day from May 2023.
• Russia kept its inactive oil wells nearly flat despite pledging deeper cuts in Q2 2023.
• Oil prices rose due to OPEC+ cuts and supply disruptions, but limited by weak U.S. data.
• OPEC+ cuts and Middle East tensions could impact global economic growth and inflation.
• OPEC expects Brent crude prices to remain above $80/barrel for the rest of 2024.