Oil price rises amid production cuts
Sounds like bad news for consumers just before Easter. Oil prices are set to rise again as major oil producers have announced that they will significantly reduce their production from May onwards.
Saudi Arabia’s Energy Ministry explained that the cut was being coordinated with some members of the Organization of the Petroleum Exporting Countries (OPEC) and non-members, called OPEC+. Which countries were not mentioned exactly. Russia, for example, is not part of the oil cartel, but is part of the OPEC+ countries.
In February, Moscow announced that it would limit its production from March. More recently, Russian Deputy Prime Minister Alexander Novak was quoted as saying that his country would extend the voluntary production cut of 500,000 barrels until the end of the year.
This is all a reaction to the price caps on Russian oil that the EU, the G7 and Australia have set. The additional cut in OPEC+ production basically plays in Russia’s favour. If prices rise as a result, Moscow could generate more revenue and thus replenish its war chest.
“The big question is, are these price increases really sustainable?” said David Kohl, chief economist at Swiss private bank Julius Baer. According to his analysis, there is a general lull in demand for oil and OPEC is just adjusting its production. If that’s the case, then the price increases would be more of a short-term rather than a long-term pattern.
How long will oil prices hover around $80
At the start of trading earlier in the week, prices on international oil markets jumped significantly upwards. A barrel of North Sea Brent sometimes jumped more than 6%. While the price of Brent has consistently stayed below $80 (€73) in the last week of trading, it still cost more than $84 as of Monday morning. Some analysts believe that prices may continue to rise in the coming weeks.
The announced supply cuts will mainly come from Saudi Arabia. If the OPEC+ plan is fully implemented, it will further tighten an already fundamentally tight oil market, says Jorge Leon, senior vice president at Rystad Energy. That would take “the Brent benchmark to $100 a barrel sooner than previously expected and take the price to around $110 a barrel this summer,” he wrote in a statement to clients.
Such increases would end the trend of recent months, when oil and energy prices fell from their highs last year. This was partly due to comparatively low demand as a result of the weakening global economy in recent months.
In China in particular, many had expected the economy to recover more quickly after Beijing lifted its tight COVID-19 restrictions. However, this demand boom did not materialize, and the Chinese economy is currently on a moderate growth trajectory.
“There has been a lot of speculation in the market that the price will fall further because of these fundamental developments. OPEC has reacted to keep prices higher,” Kohl said. From this perspective, stable prices can be expected. This would also match OPEC’s rationale for the production cuts – that it is a precautionary measure designed to stabilize the oil market as a whole.
Higher oil prices and inflation
For many economies, rising oil prices would not be good news. They would increase costs for consumers and businesses alike. Consumers are already struggling with high prices and companies with rising costs in corporate finance.
In the fight against inflation, central banks have been raising interest rates and this makes borrowing more expensive. According to the latest data from the European Central Bank, credit financing for companies in the euro zone increased by 22 basis points to 3.85% in February. Last year, interest rates on corporate loans nearly doubled.
Source: DW
Lori Barajas is an accomplished journalist, known for her insightful and thought-provoking writing on economy. She currently works as a writer at 247 news reel. With a passion for understanding the economy, Lori’s writing delves deep into the financial issues that matter most, providing readers with a unique perspective on current events.