Saudi Arabia and the rest of OPEC+ have announced oil production cuts from May for the rest of 2023 totaling 1.15 million barrels of oil a day. OPEC+ have said this is in response to the latest bout of volatility in oil prices since the bankruptcy of Silicon Valley Bank and the broader financial sector weakness.

 

Back in October, the group had already announced cuts to the end of 2022. At the time, this particularly bothered Joe Biden and the United States who were looking to keep the supply of oil to the market up, so as to keep prices low and to minimise the impact of oil price changes on inflation. As part of that plan, the United States was selling off the Strategic Petroleum Reserve to historic lows to maintain supply in the market and to help temper prices.

 

Additionally, keeping oil prices low was another tool to combat Putin's "war machine". Lower global oil prices mean lower revenues from Russia's oil exports and thus less cash to spend on the invasion of Ukraine.

 

The cuts split by country are as follows:

Saudi Arabia: -500,000 barrels per day

Iraq: -211,000 barrels per day

United Arab Emirates: -144,000 barrels per day

Kuwait: -128,000 barrels per day

Oman: -40,000 barrels per day

Algeria: -48,000 barrels per day

Kazakhstan: -78,000 barrels per day

Russia: -500,000 barrels per day

 

This comes in the same week that the International Chamber of Commerce ruled in favour of Iraq on an arbitration case against Turkey when it comes to exports from the semi-autonomous region of Kurdistan. It was been claimed by Iraq that Turkey was violating an agreement with Iraq when handling Kurdish oil via a pipeline to the Turkish port of Ceyhan. This has meant 450,000 barrels a day that was previously being shipped out of Kurdistan to Turkey has now been halted. All sides are hoping to find a resolution over the course of the next week.

 

These situations only strengthen my opinion that oil prices will remain strong in the short to medium term. Brent has flirted around USD 75 a barrel these last few weeks, and news like that we have seen this past week can comfortably push it towards USD 85. Pair that with Chinese economic reopening and the years of falling investment by oil majors across the world, supply will only get tighter.

 

Yes we are seeing global economies slow on the back of inflation and rising rates, and that will have an impact on demand, but OPEC+ are willing to cut production to make up for that softening demand, and if in the end we do get a "soft landing" (although that seems a little less likely given these last few weeks) then demand won't have softened very much at all.

 

 

 

 

 

 

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Brent Price Source: Koyfin