Picture used for illustrative purposes.
The Opec+ agreed on Monday to cut production for the first time in more than a year as it seeks to lift prices that have tumbled due to recession fears.
OPEC+, a 23-nation coalition led by Saudi Arabia and Russia, had agreed to huge cuts in output in 2020 when the Covid pandemic sent oil prices crashing, but it began to increase production modestly again last year as the market improved.
Oil prices soared to almost $140 a barrel in March after Russia invaded Ukraine.
But they have since receded below $100 per barrel amid recession fears, Covid lockdowns in major consumer China and Iran nuclear talks that could bring Iranian crude back into the market.
While analysts had expected another modest increase at Monday’s ministerial meeting, Opec+ said in a statement that it decided to reduce output by 100,000 barrels per day in October, returning to the production level of August.
The group also left the door open to holding talks prior to its next scheduled meeting on October 5 “to address market developments, if necessary”.
“First and foremost it is a clear message from the group: Opec+ will not allow the oil price to slide. Further cuts will be initiated if necessary,” Bjarne Schieldrop, chief commodities analyst at SEB research group, said.
While analysts said the cut was mostly symbolic, oil prices rose by more than three percent following the announcement, with the international benchmark, Brent, exceeding $96 per barrel while the US contract, WTI, reached almost $90.
At its last meeting, Opec+ agreed to a small rise of 100,000 barrels per day for September after US President Joe Biden travelled to Saudi Arabia to plead for a production bump.
Energy Minister Abdulaziz bin Salman last month had appeared to open the door to the idea of cutting output, which has since received the support of several member states and the cartel’s joint technical committee.
He said “volatility and thin liquidity send erroneous signals to markets at times when clarity is most needed”.
Craig Erlam, analyst at OANDA trading platform, said the cut was “also a blow to President Biden as the hike last month was viewed as a token gesture after his visit.”
Caroline Bain, commodities expert at Capital Economics, said the cut was not a total surprise and “little more than symbolic” as OPEC+ has struggled to meet its quotas due to lacklustre production in some of its member countries.
“The bigger picture is that Opec+ is producing well below its output target and this looks unlikely to change given that Angola and Nigeria, in particular, appear unable to return to pre-pandemic levels of production,” Bain said.
In efforts to curb rising oil prices, the United States and its allies have released crude from their emergency reserves. And in a bid to curb Russia’s war funding, the G7 group of industrialised powers agreed Friday to move “urgently” towards capping the price of Russian oil.
Moscow has warned that it will no longer sell oil to countries that adopt the unprecedented mechanism.
Another geopolitical issue is clouding the outlook.
Negotiations aimed at reviving a landmark nuclear deal between Tehran and world powers could lead to an easing of oil sanctions in return for curbs to the atomic activities.
Oil prices rose more than 3% on Monday, extending gains as Opec+ producers agreed a small oil production cut to bolster prices.
Brent crude futures futures for November delivery rose $3.43 to $96.45 a barrel, a 3.7% gain, by 9:14 a.m. EDT (1314 GMT).
US West Texas Intermediate crude was up $2.94, or 3.4%, at $89.87 after a 0.3% gain in the previous session. U.S. markets are closed for a public holiday on Monday.
The Organization of the Petroleum Exporting Countries (Opec) and its allies, a group known as Opec+, will reduce output by 100,000 barrels per day (bpd), amounting to only 0.1% of global demand, for October and also agreed they could meet any time to adjust production before the next scheduled meeting on Oct.5.
“It’s the symbolic message the group wants to send to the markets more so than anything,” said Oanda analyst Craig Erlam, adding that a 100,000 bpd raise last month by OPEC+ was not seen as a big deal.
“What we’ve probably seen from the markets was pricing in most of the worst-case scenario,” Erlam added.
Top Opec producer Saudi Arabia last month flagged the possibility of output cuts to address what it sees as exaggerated oil price declines.