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OPEC production cuts have no lasting impact on prices.
Stefan Wermuth/Bloomberg’s photo
Russia and Saudi Arabia announced an extension of oil production cuts on Monday to support prices, but they ended the day down 1%. It’s an illustration of how oil producers less control on the global crude oil market than they would have liked.
In theory, a reduction in oil supply should keep prices higher. In fact, it was the fear that Russian production would be disrupted after President Vladimir Putin’s invasion of Ukraine last year that sent oil prices soaring to around $120 a barrel. On Monday, prices edged up slightly earlier in the day shortly after the cuts were announced.
But that shock was then overshadowed by weak US manufacturing data, signaling weaker energy demand going forward. Oil fell on Monday. On Tuesday, the prices of both Brent Crude and West Texas Intermediate Crude rebounded about 1%.
There are a few things going on. First, there are genuine doubts about the strength of the global economy that are causing traders to be pessimistic about oil demand. Promises from the Organization of the Petroleum Exporting Countries (OPEC) to limit global supply at best can only prevent prices from falling further, but not actually lift them.
Monday, traders do not believe official data on supply and demand—statistics that can be disconnected from the physical market. For example, tanker data suggests that Russia may not have actually reduced production by 500,000 barrels per day as promised earlier this year.
And there’s a bigger problem behind that – there are big incentives for Russia, Saudi Arabia and the rest of OPEC to keep output high, especially if they expect prices to be higher.
In short, promises to reduce global oil supply should be disregarded.
Write to Brian Swint at [email protected]
