POLICY

OPEC cuts production by 2MMbopd 

OPEC and friends overnight agreed to cut oil production by 2 million barrels a day to prop up lagging oil prices and respond to inflation, despite their still sitting at over US$90 per barrel.

OPEC cuts production by 2MMbopd 

This was the first post-pandemic meeting in person, held in Vienna, with the largest of the ‘plus' members represented by Russian energy minister Alexander Novak. 
 
Before the oil price crash of early 2020, first driven by OPEC heavy hitters Saudi Arabia and Russia's failure to agree on cuts, the midterm outlook for prices offered by most of the supermajors was around $65/bbl. 
 
Saudi Arabia, the titular head of OPEC, and Russia, its largest non-member failed to agree to cuts in March 2020 and both immediately promised to increase production, driving down the price of oil just as global pandemic restrictions began to hit. 
 
The ASX energy sector followed its peers headfirst into a lengthy bloodbath, but is the strongest performer of the market today, up 2.24%. It is up 25.4% over the past 12 months. 
 
Woodside Energy Group is up 40% for the year so far, albeit helped by its megamerger with BHP's petroleum sector. 
 
The Russian invasion of Ukraine February 24 saw oil price to $100/bbl within minutes of the announcement. 
 
Despite major oil benchmarks remaining not far off triple digits the cartel and its adjunct members will make the huge production cut next month. 
 
For two years they have been holding regular online meetings to carefully manage down production as historically low prices hit petrostates' economies the hardest. 
 
The 2MMbopd is a paper target; the real fall in output will be 950,000bopd as some members have not increased production in line with earlier OPEC targets through 2020 onwards. 
 
The cuts, some 2% of global supply on paper, will last until the end of 2023. 
 
Riyadh has said it views the cuts as a way to respond to rising interest rates. 
 
Russia has been fighting a G7 cap on Russian oil sales, due to come into force in December. 
 
Washington has called the steep cuts "short sighted" and there are worries inflation will be worsened, not tempered, by the move. US shale production has been lower than expected. 
 
"The president is disappointed by the short-sighted decision by OPEC+ to cut production quotas while the global economy is dealing with the continued negative impact of Putin's invasion of Ukraine," the White House said. 
 
US Congress elections are next month, and inflation and ongoing high petrol prices are likely to be sticking points for President Joe Biden. He has directed the Department of Energy to release more from the US' Strategic Petroleum Reserve. 
 
The SPR was put in place after the 1973 oil embargo by oil producing Arab members of OPEC after US assistance to Israel during the Yom Kippur war, also launched in October. 
 
Australia has a small share of the SPR as a way to alleviate its long term stored oil shortages. 
 
Members of the International Energy Agency are expected to hold 90 days' supply of liquids. Australia has held nothing like this for a decade. It has managed to shore up a few more days' supply by holding oil in the vast SPR. 
 
The rise in oil prices will hit Australian consumers, and not long after a prior rise thanks to a return of the fuel excise. 
 
High prices will knock on to LNG exporters with oil-linked long term contracts; higher prices have seen many of Australia's largest exporters bumped up into a higher corporate tax bracket. 
 
Australia's oil and gas lobby body estimates tax tripled from last year to this. 

 

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