OPEC+’s decision to implement a small production cut is more of a political statement and symbolic message sent by the alliance, analysts said.
On Monday, the group announced a small oil production cut of 100,000 barrels per day to bolster prices. Just last month, OPEC+ decided to increase oil production by the same target of 100,000 barrels per day.
“Essentially, it’s like zero sum for the market,” said Ellen Wald, president of Transversal Consulting. “The increase [in oil production] last month was also next to nothing … and now we’re talking about taking them away.”
Wald said the underlying message is more important than the cut itself.
“The symbolic importance of this cut is, I think, much more important to the market,” Wald said, adding that the price of Brent crude was “pushed up so much” after the decision.
Oil prices rose about 3% on Monday after OPEC’s announcement. The rally has since lost steam, reducing progress in Tuesday’s trading. Brent Crude is around $95 a barrel while West Texas Intermediate hovers around $88 a barrel.
“It’s more of a political hoax for president [Joe] Biden as well as the EU is signaling that OPEC is going to go their separate ways and they want to protect the higher prices,” said Andy Lipow of Lipow Oil Associates, who also called the cut “pretty paltry.”
“[They’re] basically say – look, we’ve talked about a cut. A cut is completely within our power, and we may well implement a cut that will be much more significant than this, Wald said, adding that Russia’s influence is quite significant in OPEC+.
Price caps may end up “pushing up the oil price”
Both analysts were skeptical about the effect of Russian oil price caps.
Last week, the G-7 countries agreed to cap Russian oil prices to reduce funds flowing into Moscow’s war chest and lower oil costs for consumers.
“[It] doesn’t look like India is really about to sign on here. And neither is China,” Wald said. She explained that while some countries agree not to buy oil from Russia, other countries like India and China can buy those barrels at a discount.
“I just don’t see how this works in any way except to end up pushing up oil prices for everyone except those who continue to buy Russian oil,” she said.
Similarly, Lipow said the price cap is unaffordable because both China and India are “already benefiting from deeply discounted Russian oil” and have nothing to gain from getting on the bandwagon.
Lipow added that the price cap protects consumers from paying higher prices rather than reducing demand for oil.
“They don’t have an incentive to reduce demand… That means governments around Europe are going to print money to send to consumers, and go deeper into debt.”