Impacts of an OPEC+ Production Cut

OPEC+ delegates are meeting in person in Vienna on Wednesday, and it is widely expected that they will announce production cuts.  Oil prices have experienced a substantial decline over the past few months, and the cartel views this as a way to prop up oil prices.  Despite the announcement grabbing headlines, analysts and economists are warning that the production cut may sound more impressive than it actually is.

It’s rumored that production cuts may fall at, or even above, 1 million barrels per day (mb/d), but this number is misleading given that OPEC+ has consistently missed their target production quotas for months.  According to Edoardo Campanella, economist at UniCredit Bank in Milan, in August, “OPEC+ was collectively pumping around 30 million barrels a day (mb/d) which is about 3.5 mb/d below the official quota (meaning that global supply is almost 4% lower than it should be.”  The gap in stated quotas and actual production numbers have continued to grow, with many members, besides Saudi Arabia and the United Arab Emirates, lacking any spare capacity due to years of underinvestment.  Campanella also said that “If the group cuts targets by 1mb/d, actual output would likely drop by about 550,000 barrels/day- as countries like Russia or Nigeria are producing below quota would see their formal target decline but remaining above what they can currently produce.” 

While the impact on real production will be limited, OPEC+ is refocusing the market’s attention on the issue of supply shortages while combatting the concerns of weak demand.  The focus on maintaining spare capacity may be critical for the coming months and years, even as global recessionary fears alarm the market.  While there will certainly be some demand destruction, energy consumption will always be vital and critical to modern life, and the demand can ramp up much faster than supply can adjust.

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