Oil production cut  

This week (October 5, 2022), OPEC+ members (lead by Saudi Arabia and Russia) met in Vienna, Austria and agreed to reduce oil output by 1 million barrels per day. As usual, their main objective is to raise prices as it continues to plummet for a couple of weeks already due to weakening demand.

The reason is so obvious. With inflation soaring globally, Central Banks all over the globe (except Turkey) have been raising rates to tame it. Consequently, with unfriendly rates prevailing, some businessmen had to defer expansion plans or worse, reduce manufacturing activities. Thus, some pundits believe that global recession is inevitable. 

Such unpalatable prediction is felt and taken seriously. Thus, Brent prices went to as low as US$82 per barrel last month after drifting beyond US$100 in the previous months. So that, OPEC+ opted for this production cut. Unlike the biggest production cut in history done in 2020 of 10 million barrels a day which never raised prices at all due to the pandemic, this one will definitely do.       

To recall, a little over two years ago (April 20, 2020), at the height of the pandemic, Brent crude was selling at US$26 per barrel. As some pundits then said, it was not just that the demand for oil declined. The “demand didn’t destruct, it disappeared.” Clearly, therefore, the selfish option of oil producing countries (both OPEC and non-OPEC members) of reducing outputs to raise prices was not possible then.   

As laymen, we could only figure out two possibilities why these countries are opting for it. One is decent and a bit temporary and the other one is downright unethical. On one hand, that there is a need to recover whatever losses they had the past two years. Therefore, once fully recovered, supposedly, they will start augmenting their output to stabilize prices. On the other hand, it could be that they are cashing in on this ongoing situation and is even wishing that the war in Ukraine will last longer to rake in more. Therefore, greed-driven. Or, we may add a third one. That they are sympathetic to Russia being a member of OPEC+ and a valuable comrade in manipulating oil prices.

Whatever is the real reason, the fact remains that other oil producing countries like the USA did increase its output to soften the impact of global oil’s pocket-busting prices and they didn’t.  

Early this week though, we were able to gather some information from credible institutions as far as this move is concern. Reportedly, some analysts and OPEC watchers as well as UBS and JP Morgan suggested that a “cut of around 1 million barrels per day was on the cards and could help arrest the price decline.” And, well, that’s what OPEC+ exactly did. Additionally, Stephen Brennock of oil broker PVM said that “US$90 oil is non-negotiable for the OPEC+ leadership, hence, they will act to safeguard this price floor.”

Clearly, therefore, OPEC+ did this to prevent oil prices from going below US$90 per barrel. Just because it went to as low as US$82 in September, they immediately heeded the suggestion of some analysts as well as that of UBS and JP Morgan.  

As usual, we are in the receiving end of these price movements and can only watch helplessly. Hence, whether prices will just hover around US$90 per barrel or shoot up, we do not know. The fact though remains that even if it stays in the vicinity of the floor price, it is still very high for us.     

Worse, as the US Fed continues to raise interest rates, our peso will continue to deteriorate vis-à-vis the dollar. Therefore, for the underdeveloped and developing countries like ours (that are mostly net importers), these retail oil prices will definitely drain us down financially. No less than the UN Conference of Trade and Development (UNCTAD) confirmed this. Recently, in its report it warned that “tightening monetary and fiscal policy in rich nations like the United States could cause global recession and stagnation.” It further said that the “worldwide damage could be worse than after the 2008 financial crisis and the Covid-19 nightmare.”

Undeniably, OPEC+ oil production cut and the rich nations’ tight monetary and fiscal policy is a double whammy. Probably, the worst recipe for disaster.