OPEC+ decides to shift to production cuts
2022-09-07
OPEC Plus became more cautious about declining demand and decided to cut production in October
The impact on the actual supply and demand of crude oil is weak, and the boosting effect of WTI is limited
OPEC Plus, composed of OPEC members and non-member oil-producing countries such as Russia, held a ministerial meeting on the 5th. They agreed to reduce the production quota for October by 100,000 barrels per day from September to 43.85 million barrels per day. From early 2021 to September 2022, OPEC+ has been increasing production in stages to match demand recovery from the COVID-19 pandemic. Oil production is set to decrease slightly due to concerns about slowing world demand and the return of Iranian crude to international markets.
Saudi Arabia's Energy Minister Abdul Aziz said on August 23 that OPEC+ may be forced to cut production in response to falling demand and market volatility. Given that several OPEC+ members such as Iraq and Kuwait have reached an agreement, the October production cut appears to be within the expectations of market participants. Nonetheless, crude oil futures (WTI) rallied amid perceptions that oil-producing countries have tightened constraints on easing supply and demand.
However, the OPEC+ decision is unlikely to have much impact on the actual supply and demand of crude oil. According to the International Energy Agency (IEA) August monthly report, OPEC+ July production (excluding Iran, Libya, and Venezuela) was 40.35 million barrels per day, reaching the production target of 43.21 million barrels per day. Some oil-producing countries such as Saudi Arabia, the United Arab Emirates, and Kuwait have achieved their production targets, and there is a high possibility of production cuts from September to October. In other countries, their actual output has not caught up with their production quota due to factors such as insufficient investment. Therefore, the reduction in production quota does not appear to be directly related to its output. Although the effect of this OPEC+ production cut deal is to announce to the market a cautious approach to falling demand. According to interpretation, the decision has not fundamentally changed the crude oil supply and demand situation, and the effect of boosting WTI will be short-term and limited.