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OPEC’s production cuts haven’t had a long-term effect on prices.
Photograph by Stefan Wermuth/Bloomberg
Russia and Saudi Arabia announced an extension to oil production cuts on Monday to prop up prices, but they finished the day down 1%. It’s an illustration of how oil producers have less control over the global crude market than they would like.
In theory, reducing the supply of oil should keep prices higher. In fact, it was concern that Russian output would be disrupted after President Vladimir Putin invaded Ukraine last year that caused oil prices to skyrocket to about $120 a barrel. On Monday, prices did pop a little early in the day just after the cuts were announced.
But that jolt was later overshadowed by weak U.S. manufacturing data, signaling weaker demand for energy in the future. Oil fell on Monday. On Tuesday, prices for both Brent Crude and West Texas Intermediate rebounded about 1%.
There are a couple of things going on. First, there are real doubts about the strength of the global economy that are making traders pessimistic about oil demand. Promises from The Organization of the Petroleum Exporting Countries (OPEC) to limit global supplies may at best only be able to prevent prices from falling much further, rather than actually lift prices.
Second, traders don’t believe official data on supply and demand—statistics can be disconnected from the physical market. Tanker data, for example, suggest Russia may not have actually lowered its output by 500,000 barrels a day as promised earlier this year.
And there’s a bigger issue underneath that—there are big incentives for Russia, Saudi Arabia, and the rest of OPEC to keep production high, especially if they expect prices to be higher.
To sum up, promises to reduce the global supply of oil should be taken with a grain of salt.
Write to Brian Swint at [email protected]
