Reduce production to increase the cost of black gold. This is what the OPEC+ countries are suspected of doing, which have announced drastic cuts in their oil production. The day after the announcement, oil prices jumped on Monday. In total, eight of the 23 members of the Organization of the Petroleum Exporting Countries (OPEC) and its partners are concerned, led by Saudi Arabia.

The alliance took note of these "voluntary adjustments" to production on Monday, following a long-planned videoconference technical meeting (JMMC). In unison with its members, it assured that it was "a precautionary measure to support the stability of the oil market". But for analysts, it's mostly about generating additional "revenue," Jorge Leon of Rystad Energy said in a note. These cuts show that OPEC + will do everything to "defend a floor price well above $ 80 a barrel," he said, without worrying about criticism from the United States and other consumer countries, worried about galloping inflation.

Crude prices fell in March to the lowest in more than a year, "an unacceptable level for OPEC + members," said Ibrahim al-Ghitani, an oil market expert based in the Emirates. They had been hit hard by the banking crisis in the United States, which pushed investors away from commodities and other, more volatile risk assets.

Largest increase since the war in Ukraine

After this concerted action by the major producers of black gold, the reaction of the markets was immediate: the two global benchmarks took off by about 8% at the beginning of the session, returning to their level before the tumults of the banking sector. On both sides of the Atlantic, prices were on track for their biggest daily gains since the surges in the first weeks of the Russian invasion of Ukraine in March 2022.

Iraq, Algeria, Saudi Arabia, the United Arab Emirates, Oman, Kazakhstan, Kuwait and Gabon will therefore make significant cuts from next month until the end of 2023. They range from 500,000 barrels per day (bpd) for Riyadh to 8,000 bpd for Libreville. Moscow, for its part, has extended its reduction measure of 500,000 bpd until the end of 2023.

In total, the volume left underground will be "about 1.66 million barrels daily," OPEC+ said. "Most of the cuts will be made by countries that produce at or above the set quotas," implying "real supply reductions" and market tightening, DNB analysts said. Other countries could also "announce their own cuts if they deem it (...) necessary," Deputy Prime Minister for Energy Alexander Novak told Russian television Rossiya 24.

Increasing demand

And unlike similar measures taken by OPEC+ in the face of the pandemic or recession fears, this time global demand for oil is increasing: China, the country most greedy for black gold, is reopening its economy after lifting health restrictions.

This announcement comes on top of what had already been decided in October, namely a volume cut of two million bpd. This was the largest reduction since the emergence of Covid-19. This is a new setback for Washington, which is advocating for an opening of the black gold taps to contain prices, said Caroline Bain of Capital Economics.

From a geopolitical point of view, these reductions also testify to "the group's support for Russia", which will thus benefit from better prices to offset the impact of Western sanctions. The Kremlin on Monday defended a decision taken "in the interest" of the world market, to keep prices "at the right level", according to the spokesman of the Russian presidency, Dmitry Peskov. "Whether other countries are satisfied or not, that's their business," he told reporters.

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