The world was surprised this Sunday (2) with two announcements: that eight countries belonging to the expanded Organization of Petroleum Exporting Countries (OPEC+) would reduce oil production from May until the end of the year by 1.16 million barrels per day (db); and that Russia, a member of the group that had unilaterally reduced its production in February by 500,000 barrels per day, would also extend that deadline to the end of the year. In total, there will be a cut of 1.66 million bd.
The announcement was made one day before the entity’s monthly meeting. According to Reuters agency, the group was expected to maintain its previous decision to reach production cuts of 2 million bd by December, which had been announced in October.
In a statement after the meeting, OPEC+ confirmed what was said at the weekend and detailed how the cuts will be: Saudi Arabia will reduce its pumping by 500,000 barrels per day; Iraq, at 211,000 bd; United Arab Emirates, at 144 thousand bd; Kuwait, at 128,000 bd; Kazakhstan, at 78,000 bd; Algeria, at 48,000 bd; Oman, at 40,000 bd and Gabon, at 8,000 bd. As reported by the EFE agency, all these “voluntary” reductions, that is, without a binding and consensual agreement within the alliance, will be applied from May until the end of 2023.
This Monday (3), the markets reacted, with oil prices shooting and rising more than 6%. The barrel of Brent, the main international reference, reached its highest value since March 7: US$ 86.44.
market reaction
According to Paulo Feldmann, economics professor at the University of São Paulo (USP), the announcement was not a surprise.
“I don’t think the world was surprised because it is Saudi Arabia’s custom to do this kind of thing. In fact, oil producers have, in recent years, been acting in a very speculative way,” he said.
According to the Saudi Arabian Ministry of Energy, the voluntary reduction was a precautionary measure aimed at supporting the stability of the oil market, as reported by Reuters agency.
Feldmann explained: “That’s the big problem when you have a cartel. Cartel is prohibited worldwide. There cannot be a cartel in any sector of the economy, in any country. The only exception is OPEC+. Because cartel is a very bad thing. They agree among themselves what they want to do; they raise the price when they want to raise it; decrease; increase production; they decrease production, but they do so to the detriment of society as a whole, the world economy.”
For Russian Deputy Prime Minister Alexander Novak, the Western banking crisis was one of the reasons behind the cut, as well as “interference with market dynamics”, a Russian expression to describe the price cap imposed by the West on oil. from the country.
The OPEC+ statement added that “the meeting noted that this is a precautionary measure aimed at supporting oil market stability.”
The United States believes “that these cuts are not recommended at this time due to market uncertainty and we make that clear,” said John Kirby, spokesman for the White House Security Council. “We are focused on prices, not barrels,” he told reporters on Monday, adding that the US had received a warning prior to the announcement.
Impact
For João Ricardo da Costa Filho, professor of macroeconomics at the Brazilian Institute of Capital Markets São Paulo (Ibmec), all countries will suffer from the rise in oil prices.
“First, you have fuels. With oil becoming more expensive, its derivatives are all becoming more expensive. This causes you to have a cost increase and this is a global cost increase. This means that for all economies it will be more difficult to deal with inflation”, he highlighted.
According to him, “all economies, directly or indirectly, will suffer, because even countries that export oil, if the cost of oil, which is quoted on the international market, increases, all of that… You will have costs, for example, fuel, which increases the cost of transporting goods and services. So countries that depend on transport that use a road network, countries like Brazil, for example, where you transport a lot by road and, when transporting a lot by road, the cost of freight is very much associated with the dynamics of fuels, it is a country which is directly affected by this, but also indirectly, via the difficulty that the United States will have to reduce inflation”, he explained.
For Costa Filho, “since the US economy is a very large economy, it is a very central economy in the international monetary architecture”, it impacts all the others. “So, I think most countries will be affected in this way. The net balance will be negative,” he said.
According to Feldmann, the price increase “will not work”. For him, “everyone wants to be independent of oil. They made a ‘very short-term’ bet to make some gain now, very fast. Okay, they managed to raise the price, tomorrow maybe the price will remain high and then it will fall”.
For Feldmann, “it was too speculative a measure. The world is already vaccinated against it. It doesn’t tend to prosper. I think that in three, four days, no one will talk about it anymore. The trend is for the price to return to normal. It has happened before.”
Feldmann added that, in a scenario where the rise in oil prices persists, China would be the most affected country. “China is very dependent on oil. Not a big producer. She has to care. China would have a big impact on prices. Then the cost of Chinese products would increase. China would find it difficult to place its products on the international market because they would become more expensive,” he pointed out.
Feldmann pointed out that another country that has little oil and that would suffer would be Japan. European countries, according to him, “the more developed ones would have some impact, not like China and Japan, but they would because of the current situation of the war in Ukraine, because they are avoiding buying oil from Russia. So, that could be a problem for them, because they might have to look for other sources; they will have to stop buying from OPEC+, or they will be forced to buy from OPEC+, but then the price will be higher, so maybe Europe will also be affected, but not all European countries”.
For Feldmann, the rise in oil would have a “very short-term effect. And then the world organizes itself and increases this production that was reduced by the Arabs, in some way. And production goes back to normal very quickly and then the price drops again.” For him, countries “relatively independent of OPEC+”, such as Brazil, Norway and the United States, could increase oil production.
Forecasts
For Professor João Ricardo da Costa Filho, from Ibmec São Paulo, it is still too early to make predictions. “I think it’s still a little early, because you need to understand how other economies are going to respond to this announcement; what will be the size, for example, of the impact on economic activity of everything that has been done”, in addition to how economic activity will respond and what the reopening of China will be like.
But the analyst pointed out that “there is one thing that the evidence shows, that the literature shows: when you have interest rate increases that happen simultaneously in several economies, the net impact at the end of the story is even more negative for, for example, GDP, for unemployment, than thinking about each of the economies individually. That is, for the whole world, if I raise interest rates alone, it has an impact on my economy. Everyone raising interest rates at the same time has a greater impact on my economy. So everyone should have a stronger deceleration. This type of announcement makes the prospect of a deceleration even stronger”.
According to him, “we still need to know how economic activity will respond to what monetary policy has been doing. This is a vector. And how China will behave in the coming months will also be important. Surely, what we expected is that the price of oil for this year is now higher, but how much higher will depend on these combinations, the slowdown, on the one hand; China, on the other. Therefore, I think it’s a little early, but the financial market needs to set prices. So, what we are going to see is a higher price increase now, so this is what we call overshoot – the price will go up too much – and then he will correct. It drops a little until we start groping these vectors that impact the growth of oil price dynamics”.
Feldmann, from USP, believes that “the world is increasingly prepared to use other sources of energy and this type of measure ends up being a stimulus for countries to return to seriously thinking about abandoning oil. There was a drop in this effort, in these years, from one year to now, due to the war in Ukraine”.
According to the USP professor, “Ukraine’s war with Russia undermined the European effort to get rid of oil and natural gas. It really was a problem to go back to using things that pollute [muito], like coal. Many European countries that previously used natural gas, with the absence of natural gas — because it was from Russia — have gone back to using coal, which is a very bad thing. Now I think the world is ready for this. It is highly focused, especially Europe, on the need to remain independent of oil and its derivatives”.
#expect #cut #oil #production #announced #OPEC