Image default
Business

What cutting oil production means


background

The OPEC+ states first want to continue to voluntarily reduce oil production. They want to prevent price reductions. But that only worked to a limited extent in the end.

By Alina Leimbach, ARD financial editorial team

According to information from delegates, the OPEC+ oil association has agreed to extend an existing voluntary oil production cut by a further three months. This was reported by the Bloomberg news agency. The throttling should actually have expired, but it has already been extended several times. The countries in the OPEC+ network have been voluntarily reducing the amount of oil they produce for around a year now.

OPEC is the organization of oil exporting countries. Since the association's market power has declined, it is also cooperating with countries such as Russia that are not OPEC members. This expanded cooperation is called Opec+.

From April onwards, more funding will be provided again

The new OPEC+ plan calls for production to be slowly ramped up again from April next year, Bloomberg reported. The agency cited an unnamed delegate to the meeting. This process of slowly increasing production is expected to last until September 2026.

Observers had expected the move. “Anything else would be a big surprise for the market,” said Commerzbank raw materials expert Carsten Fritsch tagesschau24 explained.

Expert: Oil prices will go sideways

The head of real estate and macro trends at Deka-Bank, Gabriele Widmann, said: “With the OPEC decision, supply and demand are roughly in line.” It therefore now assumes that the price will remain at the current level, apart from the significant, but only short-term, price fluctuations that are usual in the price of oil.

Price stability is the central motive of OPEC+'s production restrictions. This is exactly why the delivery rate was recently reduced. Because: The demand for black gold has weakened. “Many countries are relying on decarbonization, and in view of this, the OPEC states are also developing alternatives to compensate for the potential decline in oil revenues,” says raw materials expert Widmann. Demand from China in particular was recently lower than expected.

Oversupply of oil

If more oil were produced, the price would probably fall more significantly, says analyst Fritsch. “The oil market is oversupplied. If more is produced, that would potentially put pressure on the price.” Saudi Arabia in particular has no interest in this. The country sets the tone in OPEC.

However: OPEC has lost more and more power in recent years. The states had reduced production by almost 5.7 percent of global oil production. Nevertheless, the price of oil had fallen – by around 4.8 percent. The reason for this paradox: There are also oil-producing countries outside of OPEC – and they have increased their oil production, such as the USA, Canada and Brazil, says raw materials expert Fritsch.

There has been a lot of controversy recently within the OPEC+ countries. Representatives of the Russian oil industry recently publicly expressed dissatisfaction with the OPEC+ strategy. Igor Sechin, the head of Russia's largest oil producer Rosneft, said the OPEC+ group's decisions to reduce oil production in 2016 and 2020 helped the American shale industry and made it a leading global energy exporter. In fact, the USA has been able to significantly expand its market shares.

Nevertheless, raw materials expert Widmann says: “OPEC's decision has clear effects. Otherwise, oil prices would have fallen even more significantly.”

If the USA expands oil production, the price could fall

She also doesn't see the discipline of the states as critically as is sometimes rumored. “Some countries always cut back a little and produce a little more, others even fall short of the target due to production problems.” Overall, the discipline has been quite good recently, says Widmann.

When Donald Trump takes office, the situation on the oil market could change: “Shale oil production will be accelerated. Then even more oil will come from the USA than already.” Commerzbank expert Fritsch, on the other hand, points out that oil production in the USA is already at an all-time high. “I don’t think there’s much more that can be done,” he said tagesschau24.

However, if supply still increases – for example due to more oil from the USA – the price of oil is likely to fall, despite OPEC+ production being reduced.

Related posts

Leave a Comment

* By using this form you agree with the storage and handling of your data by this website.