Big Oil Majors take precautionary step to stabilize oil market by cutting production

The globe’s major oil companies, commonly known as “Big Oil Majors,” made a somewhat surprising move to cut production by over one million barrels per day as a “precautionary” move to stabilise the oil market.

Russia, a leading member of the OPEC+ cartel, also decided to extend their existing cut of 500,000 barrels per day until the end of the year. This move by the Big Oil Majors was described as “a responsible and preventive action” by Russia. However, the cuts made by these countries risk increasing inflation and putting pressure on interest rates, reported Thai PBS.

The reductions by Saudi Arabia, Iraq, the UAE, Kuwait, Algeria, and Oman from May until the end of the year will be the largest reduction since the OPEC+ cartel cut two million barrels per day in October. Consequently, oil prices rose by almost 6% in Asian trading this morning, with West Texas Intermediate surging by 5.74% to US$80.01 a barrel and Brent rising 5.67% to US$84.42.

The official Saudi Press Agency said…

“This is a precautionary measure aimed at supporting the stability of the oil market.”

UAE-based oil expert Ibrahim al-Ghitani said…

“The cuts follow a drop in oil prices triggered by jitters over the banking sector, following the collapse of US lender Silicon Valley Bank and investment banking company UBS’s hurried buy-out of troubled rival Credit Suisse.

“Brent crude oil prices, trading just below US$80 a barrel late last week, should bounce to above US$80 as a result of the reductions. Prices below US$80 are unacceptable for OPEC+.

“The producing countries adhere to a balancing level that supports their large financial budget this year, and their next economic plans.”

The reductions that are currently being implemented by the Big Oil Majors are a result of a controversial decision made in October by OPEC, along with its allies, including Russia, who are collectively known as OPEC+. The decision was to cut production by two million barrels per day, which was the largest cut since the height of the Covid pandemic in 2020. Despite concerns that this would further increase inflation and lead to central banks raising interest rates, the cut was still implemented.

In February, OPEC raised its 2023 world oil demand forecast, predicting growth in demand of 2.3 million barrels per day, reaching an average of 101.87 million barrels per day this year. However, Gulf analyst Yesar al-Maleki explained that “initial expectations of higher demand in the second half are now challenged by the prospects of continued high inflation and recessionary pressures.” He added that “OPEC is taking a pre-emptive measure in case of demand reduction in the second half is possibly higher.”

The reductions announced by each country are as follows: Saudi Arabia will cut 500,000 barrels per day, Iraq 211,000, the UAE 144,000, Kuwait 128,000, Algeria 48,000, and Oman 40,000.

The reductions ignore calls from the United States to raise production as consumption rises and as China, the world’s biggest oil consumer, reopens after its Covid shutdown.

Last month, Jose Fernandez, the US Undersecretary of State for Economic Affairs, Energy and the Environment, said…

“As world economies recover, we’ll see more consumption. And therefore we’d like to see supply meet demand.”

OPEC+, consisting of 13 members of the Organization of the Petroleum Exporting Countries and 11 non-OPEC allied countries, will hold a Joint Ministerial Monitoring Committee meeting via video link today.

Following Russia’s invasion of Ukraine early last year, which caused prices to rise above US$120 a barrel, US President Joe Biden has been calling for an increase in the OPEC+ output. However, after the cut in October, which happened before the US mid-term elections, Biden warned Saudi Arabia, a long-standing ally, of potential consequences.