If you’ve been keeping up with the latest reports from news sources, you likely know that the Organization of the Petroleum Exporting Countries (OPEC) and a group of non-OPEC countries (collectively known as OPEC+) have announced production cuts.
You may be wondering how these production cuts could impact the markets and what, if anything, could affect the future of the oil markets.
In this article, we’ll look at what OPEC+ is, why it’s cutting production, and what implications the cuts could have for traders and the overall financial markets.
Table of Contents
What Is OPEC+?
OPEC+ is an organization that was formed in 2016 when OPEC (The Organization of the Petroleum Exporting Countries) and non-OPEC countries (led by Russia) agreed to work together to manage the oil market. The goal of OPEC+ is to stabilize prices and prevent supply disruptions.
Why Is OPEC+ Cutting Production?
OPEC+ is cutting production quotas in what appears to be an effort to raise prices. The group is currently producing more oil than is required to meet demand. In fact, some OPEC+ producers aren’t making enough oil to meet the quotas assigned to them. So, by cutting production, they could effectively reduce the supply and increase prices.
Implications for Financial Markets
The OPEC+ cuts could have several implications for the population which trades on the financial markets, for example. First and foremost, it could lead to higher oil prices. This would be good news for energy companies and investors but bad news for consumers who will have to pay more for gasoline and other products that use oil.
Moreover, the cuts could lead to supply disruptions if OPEC+ producers don’t make enough oil to meet demand. This could cause prices to spike and create opportunities for traders who are able to anticipate the move.
Finally, the cuts could exacerbate tensions between the United States and OPEC+ producers. The Biden administration recently stated that there would be consequences for such oil market manipulation. If prices do rise in response to the cuts, it’s possible that we will see a response from the administration.
In any case, analysts will want to closely monitor the situation as it develops. In the past, we as a population are likely used to Iraq producing oil far beyond its quotas, and so a potential production shortfall from the country could have a significant impact on prices.
The current agreement from OPEC+ is to cut production by a total of 2 million barrels per day from November on. These cuts come on top of the existing production quotas, which are already below what’s needed to meet demand.
This means that the market is currently oversupplied by about 2 million barrels per day (bpd). So, if OPEC+ adheres to the quotas, we could see a significant reduction in supply and an increase in prices.
Speculation about whether OPEC+ will stick to the production cuts has been one of the main drivers of oil prices in recent weeks. So far, there has been little evidence that the group won’t cut production. However, Saudi Arabia’s oil minister, Abdulaziz bin Salman, believes the cuts won’t be quite as dramatic as those agreed upon by OPEC+.
Rather, he believes they will fall somewhere in the 1 million bpd to 1.1 million bpd range. This is still a significant reduction in supply, but it’s not as severe as the 2 million bpd cuts that are currently priced into the market. If Saudi Arabia’s forecast is accurate, we could see oil prices fall from current levels.
What It All Means
The oil market was quick to respond to the news of potential production cuts from OPEC+. Prices spiked on the news, with WTI crude rising as high as $93 per barrel.
There is much general concern that we are headed toward a worldwide recession. The last time we had a recession, oil prices spiked to as much as $190 per barrel but fell to a $58 low near its end. So even if prices do rise in the short term on news of production cuts, it’s possible that we could see them fall back down to those levels in the coming months.
The OPEC+ cuts just began, and they have already had a profound impact on the oil markets. The most immediate effects were seen in the price of crude oil, which spiked sharply after the announcement of the cuts. However, the effects of the OPEC+ cuts go far beyond just the price of oil.
In the short term, the OPEC+ cuts have led to a decrease in the production of crude oil. This has propped up prices, as demand for oil remains high while supply is relatively low. In the longer term, the OPEC+ cuts could lead to even higher prices as demand continues to grow and supplies remain constrained.
Time will tell with the market’s reaction - it will be interesting to watch developments over the coming weeks as the cuts come into effect and the market adjusts to the new supply-demand balance.
If the cuts are successful in reducing the glut and boosting prices, it could be a bullish development for oil markets. However, if the cuts fail to have the desired effect or if demand weakens further, it could put downward pressure on prices.
As always, it is important to carefully monitor the markets and use sound risk management techniques in order to protect your capital. The OPEC+ cuts could have a major impact on oil markets in the weeks and months ahead, so make sure you are prepared for whatever the market may bring.
When the OPEC+ group of oil-producing nations agreed to cut production to prop up prices, it had a profound effect on the markets. The cuts took away a significant amount of crude oil from the market, which helped to push prices higher.
From an overall market perspective, it will be crucial to keep an eye on the OPEC+ output cuts, as they will continue to have an impact on prices. Crude oil is a volatile commodity that is inevitably poised for sudden market movements given this recent financial event.
Ready to start your investing journey? Join Admirals by clicking the banner, below:
This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.