OPEC+ said on Wednesday that it reduce oil production of 2 million barrels per day, the largest reduction since the start of the pandemic, in a move that threatens to drive up gasoline prices higher a few weeks before the United States midterm elections.
The group of major oil producers, which includes Saudi Arabia and Russia, announced the production cut following its first face-to-face meeting since March 2020. The cut amounts to around 2% of global oil demand.
The price of Brent crude rose 1.5% to over $93 a barrel on the news, adding to gains this week ahead of the oil ministers’ meeting. U.S. Oil rose 1.7% to $88.
The Biden administration slammed the OPEC+ decision in a statement Wednesday, calling it “short-sighted” and saying it will hurt low- and middle-income countries the most high energy.
Production cuts will begin in November and the Organization of the Petroleum Exporting Countries (OPEC) and its allies will meet again in December.
In a statement, the group said the decision to cut production was taken “in light of the uncertainty surrounding the outlook for the global economy and the oil market”.
Global oil prices, which soared in the first half of the year, have since fallen sharply on fears that a global recession could dampen demand. Brent is down 20% since the end of June. The global benchmark hit a high of $139 a barrel in March after Russia invaded Ukraine.
OPEC and its allies, which control more than 40% of world oil production, hope to anticipate a drop in demand for their barrels following a sharp economic slowdown in China, the United States and Europe.
Western sanctions against Russian oil are also muddying the waters. Russian production held up better than expected, with supplies being diverted to China and India. But the United States and Europe are currently working on ways to implement a G7 agreement to cap the price of Russian crude exports to third countries.
The oil cartel came under intense pressure from the White House ahead of its meeting in Vienna as President Biden tried to secure lower energy prices for American consumers. Senior Biden administration officials were pressuring their counterparts in Kuwait, Saudi Arabia and the United Arab Emirates (UAE) to vote against cutting oil production, officials said.
The prospect of a production cut was touted as a “total disaster” in draft talking points released by the White House to the Treasury Department on Monday, which CNN obtained. “It is important that everyone is aware of the magnitude of the stakes,” said a US official.
With just a month to go before the critical midterm elections, gasoline prices in the United States have started to climb again, posing a political risk that the White House is desperately trying to avoid.
Rising oil prices could mean inflation stays higher for longer and add pressure on the Federal Reserve to raise interest rates even more aggressively.
But the impact of Wednesday’s drop, while a bullish signal for oil prices, could be limited as many smaller OPEC producers struggled to meet previous production targets. .
“An announced reduction in any volume is unlikely to be fully implemented by all countries, as the group is already 3 million barrels per day behind its stated production cap,” said Jorge Leon, Rystad Energy analyst, in a note.
Rystad Energy estimates that the global oil market will be oversupplied by the end of the year, mitigating the effect of production cuts on prices.
— Alex Marquardt, Natasha Bertrand, Phil Mattingly, Mark Thompson and Betsy Klein contributed to this report.