Gasoline prices: Oil-producing countries cut production target to keep prices high

Gasoline prices: Oil-producing countries cut production target to keep prices high

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OPEC+ decided on Monday, September 5, to reduce its production targets in order to maintain control of the cost of a barrel of oil, which has experienced historic increases after the Covid-19 crisis.

The OPEC + countries decided this Monday to reduce their production to support prices in the face of fears of recession, a first in more than a year and the drastic cuts made by the Covid-19 pandemic.

Representatives of the thirteen members of the Organization of the Petroleum Exporting Countries (OPEC) and their ten allies agreed to “revert to August quotas”, a drop of 100,000 barrels from September, the alliance announced in a press release. The group, which met by videoconference on Monday, September 5, leaves the door open for further discussions before the next meeting on October 5, “to respond if necessary to market developments.”

Over the course of its monthly meetings, OPEC+ is resisting calls from Westerners to open its floodgates wider to contain rising prices and inflation at their highest level in decades. Buoyed by the news, prices for the two global benchmark crudes rose more than 3% to $96.40 a barrel for North Sea Brent and $89.80 for WTI around 12:00 p.m. 50 hours GMT (2:50 p.m. in Vienna).


“This symbolic fall is not a real surprise after the murmurs of recent weeks,” Caroline Bain, an analyst at Capital Economics, reacted in a note. The Saudi Minister of Energy, Abdelaziz ben Salman, had seemed to open the door, ten days ago, to the hypothesis of a cut, denouncing a market “fallen into a vicious circle of low liquidity and extreme volatility”. Affected by an increasingly gloomy global economic outlook, prices had recorded their third consecutive monthly fall in August, far from their highs at levels close to 140 dollars a barrel.

“Better stop now. Better be too careful,” explains Bjarne Schieldrop, an analyst at Seb, to explain OPEC+’s decision. The alliance “clearly wants to keep the prices high” that provide lucrative revenue, adds Craig Erlam, an analyst at Oanda. In addition, “he may fear that the return of Iranian crude to the market will tip the market balance in favor of supply and therefore lower prices,” he adds.

Hopes have recently been revived for a deal, which would be accompanied by an easing of US sanctions, particularly on oil. Faced with a new shower of cold water in these endless talks: the United States estimated this Thursday that Tehran’s response to the text presented by the European Union was “unfortunately (…) not constructive.”

Question of “credibility”

Another element that is taken into account is the inability of OPEC + to achieve its objectives. “Current production and quotas are now disconnected, so it’s a credibility issue,” Schieldrop says. Prolonged political crises, or lack of investment and maintenance during the pandemic, are now harming oil infrastructure: many countries in the group, such as Angola or Nigeria, cannot pump more, as they seem to be at maximum capacity.

Only Saudi Arabia and the United Arab Emirates appear to have spare production capacity. It is also a new message addressed to Westerners, who are trying at all costs to curb inflation. Last announcement to date, the seven most industrialized countries decided on Friday to put an “urgent” cap on the price of Russian oil, in order to limit the resources that Moscow obtains from the sale of hydrocarbons. But Russia has warned that it will no longer sell oil to countries that adopt this unprecedented mechanism. Then the supply in the market could be reduced, which would contribute to a new rebound in prices, which, despite the recent fall, remain historically high and extremely volatile.

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