Oil prices jumped on Monday after some of the world’s biggest producers agreed to cut production.
The reason oil prices rose was that members of the Organization of Petroleum Exporting Countries (OPEC), and its allies, agreed a surprise cut in production over the weekend.
The move, led by Saudi Arabia, will take effect next month and will reduce the supply of crude by more than 1m barrels a day. This is about 1% of the 100 million barrels of oil produced worldwide each day.
A barrel of Brent crude – one of the benchmarks for the market rose above $85 a barrel on Monday.
At the time of this report, Brent Crude is trading at $85.54 per barrel while Western Texas Intermediate is trading at $81.04 per barrel.
Prior to this, oil prices were in the $60 and $70 range. OPEC+ had already cut production by 2 million barrels a day in October 2022.
Ipek Ozkardeskaya, senior analyst at Swissquote Bank, says it is possible “but hard” for oil prices to reach $100 a barrel, adding: “If the rising oil prices hit the global demand prospects at quite an uneasy time for the world economy (due to the bank stress) and further spurs recession worries, there is a chance that the rally in oil prices fades quickly.”
Why did OPEC+ cut production?
This is a preemptive move from OPEC+ ahead of an economic slowdown and potential recession. It’s also an attempt by the cartel to sort of put a floor on oil prices, and a signal it likes that $80 number.
There has been a lot of market anticipation around China’s reopening after harsh shutdowns due to the pandemic were ended in late 2022 and what that might mean for the global economy, but it is starting to look like it may not be as much of a game changer as anticipated.
Also, concerns around a potential banking crisis springing from the collapse of Silicon Valley Bank and troubles with banks in the US and Europe may explain some of OPEC+’s thinking as well. Oil prices cratered during the 2008-2009 crisis, and that memory could have producers on edge.
Ifunanya Ikueze is an Engineer, Safety Professional, Writer, Investor, Entrepreneur and Educator.
