OPEC+ Makes Largest Production Cut Since 2020 — By 2 Million Barrels Per Day

The Organization of Petroleum Exporting Countries and its allies (OPEC+)  🛢 have agreed on the recommendation to collectively trim the output limit by 2 million barrels per day to support crude oil prices. Such a decline in production may occur for the first time since April 2020, as the cost of oil has now begun to decline amid a decline in the rate of production, as it did two years ago. 

Markets were partly prepared for such an outcome of the OPEC+ members' meeting, since earlier the Joint Ministerial Monitoring Committee (JMMC) members had recommended a 2 million barrels a day cut in the output limit ahead of the OPEC+ ministerial meeting. The 45th meeting of the JMMC and the 33rd OPEC and the non-OPEC ministerial meeting were held on October 5th in Vienna, Austria.

World oil and fuel prices are expected to rise

Probably, the news agency had reported that such would have a smaller impact on global supply than the headline number suggests because several countries are already pumping well below their quotas. Simply put, they would already comply with OPEC+ new limits without having to cut production. 

📈 Nevertheless, it is enough to expect global oil prices to rise from about $93 to $100 per barrel, with U.S. benchmark prices rising from $88 to $92.

As per calculation based on September output numbers, the cut of 2 million barrels a day in the group’s output target, shared pro rata – would require just eight countries to trim their actual output and that will lead to a real reduction of 880,000 barrels a day.

However, notably, the 2 million barrel cut will still be the largest cut by OPEC+ since 2020. Such is expected to be another shock to the global economy which is already impacted by multi-year high inflation with central banks firefighting the consumer price by monetary policy tightening. Also, the move is announced amidst high energy  ⚡ costs.

How did the markets react to the OPEC+ decision?

💰 The predictable and logical market reaction to the OPEC+ decision to reduce oil production was the rise in the price of Brent oil ($OIL_U2) by $1.5-2 and Crude oil ($OIL.WTI) by $1.5 a few hours after the announcement of the meeting results.

Shares of energy giants ExxonMobil ($XOM) and Chevron ($CVX) were up during Wednesday's market trading. 

$XOM surged 4% to 98.98. $CVX edged up 0.4% on Wednesday after increasing 3.9% to 157.58 on Tuesday.

What to expect in the global energy market?

At the moment, all factors are pointing to a likely rise in the price of Brent and WTI oil in the coming weeks. It is predicted that Brent could reach $100 as early as December-January if Joe Biden does not continue to actively "burn" the Strategic Petroleum Reserve (SPR). 

As a reminder, the Biden administration has also released 160 million barrels of crude 🛢 from the SPR since March, in an attempt to bring down gasoline prices and stabilize oil prices. But this is a temporary measure that destabilizes U.S. energy security. There are no other factors temporarily able to restrain the price of oil for the time being, until the next OPEC+ decision.

💡 Accordingly, we are entering a new phase of rising oil prices, which could also lead to an increase in the share price of the largest energy companies. 

Summary

• OPEC+ agreed to cut production by 2 million barrels per day (bpd), the largest reduction since April 2020, as the cartel aims to keep oil prices high amid low global inventories.
• Shares of energy giants were up during Wednesday's market trading.
• The market reaction to the OPEC+ decision to reduce oil production was the rise in the price of Brent oil by $1.5-2 and Crude oil by $1.5 a few hours after the announcement of the meeting results.
• Probably, we are entering a new phase of rising oil prices, which could also lead to an increase in the share price of the largest energy companies.