OPEC and its allies led by Russia on Monday agreed a small oil production cut to bolster prices that have slid on fears of an economic slowdown.
The oil producers will cut output by 100,000 barrels per day (bpd), amounting to only 0.1 per cent of global demand, for October. They also agreed that OPEC’s leader Saudi Arabia could call an extraordinary meeting anytime if volatility persists.
The decision essentially maintains the status quo as OPEC has been observing wild fluctuations in oil prices.
“OPEC+ is wary of protracted price volatility generated by weak macro sentiment, thin liquidity and renewed China lockdowns, as well as uncertainty over a potential US–Iran deal and efforts to create a Russian oil price cap,” said Matthew Holland at Energy Aspects.
Top OPEC producer Saudi Arabia last month flagged the possibility of output cuts to address what it sees as exaggerated oil price movements.
Benchmark Brent crude oil has dropped to about $95 a barrel from $120 in June on fears of an economic slowdown and recession in the West.
Russia’s Deputy Prime Minister Alexander Novak said on Monday the OPEC+ oil output cut was merely a reflection of expectations of a weaker global economic growth.
Oil prices have been also dragged down by a potential supply boost from Iranian crude returning to the market if Tehran is able to revive its 2015 nuclear deal with global powers.
“The political angle, it seems, is a Saudi message to the US about the revival of the Iranian nuclear agreement … It is hard to interpret the decision as anything but price supportive,” said Tamas Varga of oil broker PVM.
Iran is expected to add 1 million bpd to supply, or 1 per cent of global demand, if sanctions are eased, though the prospects for a nuclear deal looked less clear on Friday.
The White House said on Monday US President Joe Biden was committed to take all steps necessary to shore up energy supplies and lower prices.
“The cut suggests that there is a desire to defend oil prices to stay above the level of $90 per barrel,” said Giovanni Staunovo at UBS.
Raad AlKadiri at Eurasia Group said: “It is a signal of intent … The decision to cut reinforces that ‘do not take us for granted’ message without doing anything drastic.”
Signals from the physical market, however, suggest supply remains tight and many OPEC states are producing below targets while fresh Western sanctions are threatening Russian exports.
Russia has said it will stop supplying oil to countries that support the idea of capping the price of Russian energy supplies over its military conflict in Ukraine.
Russia’s gas deliveries in Europe, meanwhile, have been cut further, which is likely to spark more price spikes.
“An output cut won’t make them any friends at a time when the world is facing a cost-of-living crisis,” said Oanda analyst Craig Erlam.