OPEC+ announced Wednesday that it will reduce oil production by 2 million barrels per day, the largest reduction since the outbreak began, in a move that threatens to raise gasoline prices just weeks before the US midterm elections.
Following its first in-person meeting since March 2020, the group of major oil producers, which includes Saudi Arabia and Russia, announced the production cut. The reduction is roughly equivalent to 2% of global oil demand.
On the news, the price of Brent crude oil rose 1.5% to more than $93 per barrel, adding to gains this week ahead of the gathering of oil ministers. Oil in the United States was up 1.7% to $88.
In a statement issued on Wednesday, the Biden administration criticized the OPEC+ decision, calling it “shortsighted” and claiming that it will disproportionately harm low and middle-income countries already dealing with high energy prices.
The production cuts will begin in November, and OPEC and its partners will meet again in December.
The group stated in a statement that the decision to reduce production was made. “in light of the uncertainty that surrounds the global economic and oil market outlooks.”
Global oil prices, which skyrocketed in the first half of the year, have since plummeted on concerns that a global recession will reduce demand. Brent crude has declined by 20% since the end of June. Following Russia’s invasion of Ukraine, the global benchmark reached a high of $139 per barrel in March.
OPEC and its allies, which control more than 40% of global oil production, are hoping to avoid a drop in demand for their barrels caused by a sharp economic slowdown in China, the US, and Europe.
Western sanctions on Russian oil are also complicating matters. Russia’s output has outperformed expectations, with supplies diverted to China and India. However, the US and Europe are now working on ways to put a G7 agreement to cap the price of Russian crude exports to third countries into effect.
The White House put intense pressure on the oil cartel ahead of its meeting in Vienna, as President Biden sought lower energy prices for US consumers. Officials say that senior officials in the Biden administration were trying to convince their counterparts in Kuwait, Saudi Arabia, and the United Arab Emirates (UAE) to vote against cutting oil production.
‘Total disaster,’ you say? Perhaps not
In a draft of talking points that the White House sent to the Treasury Department on Monday, the possibility of a production cut was described as a “total disaster.” CNN got a hold of these talking points. “It’s critical that everyone understands just how high the stakes are,” one US official said.
With less than a month until the crucial midterm elections, US gasoline prices have begun to rise again, posing a political risk that the White House is desperately attempting to avoid.
Rising oil prices could mean higher inflation for longer, putting additional pressure on the Federal Reserve to raise interest rates even more aggressively.
However, while Wednesday’s cut was a bullish signal for oil prices, its impact may be limited because many smaller OPEC producers were struggling to meet previous production targets.
“An announced cut of any volume is unlikely to be fully implemented by all countries,” Rystad Energy analyst Jorge Leon wrote in a note.
According to Rystad Energy, the global oil market will be oversupplied between now and the end of the year, reducing the impact of production cuts on prices.
How many barrels did OPEC cut?
OPEC, Russia, and other producers announced 2 million barrels per day cuts in Vienna on Wednesday, beginning in November 2022.