On April 3, 2023, the Organization of the Petroleum Exporting Countries accepted crude oil production cuts announced by major oil producing countries. file | Photo Credit: Reuters
the story So Far: Major oil-producing countries, including Saudi Arabia, Iraq, the United Arab Emirates, as well as Russia, have announced a cut in oil production Which will start in May and will run till the end of 2023. The announcement caused an immediate jump in crude oil prices. On 3 April, the Organization of the Petroleum Exporting Countries (OPEC) in its 48th meeting of the Joint Ministerial Monitoring Committee accepted the crude oil production cuts announced by the major oil producing countries. OPEC+ countries include the 13 major OPEC members and 10 other major oil producers. The new generation cut is in addition to the cut announced in October 2022.
Why are OPEC+ countries cutting crude oil production?
According to OPEC’s official statement, the decision to cut crude oil production was aimed at supporting stability in the market. In February 2023, Russia announced that it would cut crude oil production by half a million barrels, a day after Western countries slashed the price of their crude oil as a response to the war in Ukraine. Russia’s Deputy Prime Minister Alexander Novak said the production cuts would help the restoration of “market relations”, Reuters reported.
The G-7 bloc of advanced economies announced a price cap of $60 a barrel for Russian crude through December 2022. in Ukraine,” European Commission President Ursula von der Leyen said in a statement at the time. “It will also help us stabilize global energy prices, benefiting countries around the world that currently rely on oil facing higher prices.
In addition, recent developments in the banking sector in the US and Europe, including the collapse of Silicon Valley Bank and the turmoil at Credit Suisse, have fueled the prospect of an impending recession. Oil prices fell 1% to a two-week low for March 2023 on speculation of a recession and hence a reduction in oil demand. Experts believe that the cut in production will increase the prices of crude oil in the international market. A sudden jump in the prices of Brent crude and US West Texas Intermediate (WTI) crude – both the key global oil benchmarks – was seen in the wake of the announcement of the decision to reduce production.
According to Reuters, the production cuts are also a way to punish short sellers who bet on falling oil prices.
Are production cuts important?
According to the latest voluntary production adjustment, Saudi Arabia will cut by 500,000 barrels per day; Iraq 211,000; United Arab Emirates 1,44,000; Kuwait 1,28,000; Kazakhstan 78,000; Algeria 48,000; Oman 40,000; and Gabon 8,000 barrels a day. These cuts are in addition to the two million barrels per day reduction announced in October 2022. Russia had already announced a cut of 500,000 barrels per day earlier this year.
The US called OPEC’s decision “unfair”. “Our focus will remain on ensuring that energy markets are able to support a growing economy and keep prices down for Americans,” a White House official said during a press briefing.
How will it affect India?
According to World Energy Outlook 2021 data, India ranks third in the world in crude oil imports after China and the US, while it ranks 21st in crude oil production and 26th in natural gas production.
The disparity in the two rankings reflects the country’s growing dependence on imports to meet its energy needs.
India’s crude oil imports from Russia touched a new high in February this year reaching 1.6 million barrels per day. This was more than the combined imports of traditional suppliers such as Iraq and Saudi Arabia. At the same time, supplies from Iraq and Saudi Arabia reached a 16-month low.
Russia’s increased share in India’s crude oil imports is a direct result of the fallout between Russia and the West following the Ukraine invasion that began in February 2022.
In order to isolate the country internationally, the countries of America and Europe decided not to buy crude oil from Russia. However, the decision provided an opportunity for India to buy Russian oil, reportedly at subsidized rates.