Oil Prices Plunge as OPEC+ Extends Output Cuts Amid Market Turmoil

The group reaffirms its commitment to gradually restore production cut during the pandemic

by Motoni Olodun

The OPEC+ group of oil-producing countries has decided to maintain its current output reduction strategy until the end of the year despite the global market rout that has sent oil prices tumbling to their lowest level in a month. The group, which includes Saudi Arabia, Russia, and other major producers, met on Wednesday to review its policy amid concerns about the impact of the coronavirus pandemic, the US debt ceiling crisis, and the Chinese property sector meltdown on oil demand and supply.

According to a statement from the group, OPEC+ reaffirmed its commitment to gradually restore 5.8 million barrels per day (bpd) of production that was cut during the peak of the pandemic last year. The group said it would increase its output by 400,000 bpd every month until December, as planned, and then reassess the market situation in January 2024. The group also said it would continue to monitor market developments and act accordingly to ensure the stability of the oil market.

The decision surprised some analysts and traders who had expected OPEC+ to either pause or reverse its output increase in response to the recent oil price slump. Brent crude, the international benchmark, fell below $80 a barrel on Wednesday, down from over $86 a barrel earlier this month. West Texas Intermediate (WTI), the US benchmark, dropped below $75 a barrel after reaching above $82 a barrel in early October.

The oil price decline was driven by a combination of factors, including rising US crude inventories, signs of slowing economic growth in China and other major oil consumers, and fears of a potential US default if Congress fails to raise the debt ceiling by October 18. The sell-off in global equity markets also weighed on oil prices as investors sought safe-haven assets amid heightened uncertainty and volatility.

However, OPEC+ leaders expressed confidence that the oil market fundamentals remained solid and that the demand recovery would continue in the coming months. Saudi Arabia’s energy minister, Prince Abdulaziz bin Salman, said that OPEC+ had a “very good handle” on the market and that there was no need to panic or overreact. He also said that Saudi Arabia would keep its voluntary output cut of 1 million bpd until the end of the year as a gesture of goodwill and support to the market.

Russia’s deputy prime minister, Alexander Novak, also said that OPEC+ had decided to stick to its output plan, adding that the market fluctuations were temporary and that the long-term outlook was positive. He said that Russia expected oil demand to grow by 5.5 million bpd this year and by another 3.5 million bpd next year, reaching pre-pandemic levels by mid-2022.

Some analysts agreed that OPEC+’s cautious approach was justified, given the oil market’s uncertainty and risks. They said that OPEC+ had enough flexibility and spare capacity to adjust its policy if needed and that it was better to wait for more clarity on the demand and supply situation before making any drastic changes.

Others warned that OPEC+ might be underestimating the downside risks and that it could lose market share and credibility if it failed to respond to changing market conditions. They said that OPEC+ might have to reconsider its output plan sooner rather than later, especially if oil prices continue to fall and threaten the fiscal stability of some of its members.

Despite the challenges and uncertainties, OPEC+ expressed optimism that the global economy and the oil market would overcome the current difficulties and achieve sustainable growth and stability in the future. The group said it would continue to work closely with its partners and stakeholders to ensure a balanced and orderly oil market for the benefit of all.

Source: BNN Bloomberg

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