OPEC+ announces larger than expected oil cuts, price spike fears grow

On Wednesday, October 5, the OPEC+ group of countries announced that it would cut oil production by 2 million bpd starting November 2. This reduction is larger than the expected reduction of 1 million to 1.5 million barrels in an already tight market.

The decision led to a surge in oil prices, with Brent jumping 2% to $93.80, its highest level since September 15. Because of the gap between targets and production, Goldman Sachs expects actual production cuts to amount to half a million barrels per day.

OPEC+ has been below its production targets for months. As such, many analysts note that the production cuts agreed upon at this meeting were intended to bring the targets closer to actual production. Joe Biden’s administration was hoping to persuade the Middle Eastern country not to cut supply. This would have further increased fuel prices and added to runaway inflation.

Joe Biden called this latest decision “a very bad decision.unnecessary“. President Biden also hinted that the U.S. would release more oil from its strategic reserves to control costs. Next month, the Biden administration will release an additional 10 million barrels from the U.S. Strategic Petroleum Reserve.

Jake Sullivan, the U.S. national security adviser, said the president was “disappointed by this short-sighted decision … at a time when the global economy is dealing with the continued negative impact of Putin’s invasion of Ukraine“. He added that the Opec+ decision “will have the most negative impact on low- and middle-income countries that are already suffering from higher energy prices“.

Brent crude will reach $110 a barrel

For the final quarter of the year, banking giant Goldman Sachs has raised its oil price target to $110 per barrel. Following OPEC+’s decision to cut production, JPMorgan also suggested that Brent could rebound to $100 in the current quarter.

Although Brent has fallen from $130 a barrel, Russia’s invasion of Ukraine has tightened supplies. As Western nations sanctioned Russia, supply dynamics were shaken. Russia offered significant discounts to India and China and increased its sales to those countries. RAC fuels spokesman Simon Williams said:

“Such a significant reduction in oil production will inevitably lead to higher oil prices, which will drive up the wholesale price of fuel. The question is when, and to what extent, retailers will choose to pass on these higher costs to their service stations. Despite three consecutive months of lower prices at the pump, we believe that in many cases motorists are having to pay more to fill up today than they should based on average wholesale prices in recent weeks.”