scorecardresearchCrude oil prices jump 2% after OPEC+ agrees to cut oil production by 2 million barrels per day

Crude oil prices jump 2% after OPEC+ agrees to cut oil production by 2 million barrels per day

Updated: 06 Oct 2022, 08:14 AM IST
TL;DR.
As President Biden has been attempting to control gas prices ahead of the midterm elections, a supply cut will also heighten tensions between Saudi Arabia and the United States. Rising oil prices could mean inflation remains higher for longer and add to pressure on the Federal Reserve.
Russian oil sanctions imposed by the West are already clouding the situation. On September 02, the G7 nations agreed to implement a price cap on oil imports from Russia. 

Russian oil sanctions imposed by the West are already clouding the situation. On September 02, the G7 nations agreed to implement a price cap on oil imports from Russia. 

Crude oil prices rose nearly 2% on Wednesday, reaching three-week highs after OPEC+ members agreed to cut oil production by 2 million barrels per day, the largest reduction since the pandemic began. The reduction is roughly equivalent to 2% of global oil demand.

In a statement, the group said the decision to cut production was made "in light of the uncertainty that surrounds the global economy and oil market outlooks."

As President Biden has been attempting to control gas prices ahead of the midterm elections, a supply cut will also heighten tensions between Saudi Arabia and the United States, according to media reports.

Oil prices, which have fallen to $75 levels from a peak of $140 in March, will rise as a result of the drastic cuts. Since July 12, both WTI and Brent have been trading below $100 on the back of recession fears, interest rate hikes, and concerns over the demand slowdown in China due to the country’s strict adherence to its zero-COVID strategy.

In September, crude oil prices tumbled 9%, marking a fourth consecutive monthly loss. As the price of crude oil declines month after month, OPEC+ steps up its efforts. Last month, OPEC+ members reduced output to 100,000 barrels per day for October, which represented just 0.1% of the world's demand.

Inflation is sweeping across the world, with major economies experiencing decade-high inflation rates on the back of geopolitical tension that began in February. In a fight against inflation, central banks around the world have already hiked interest rates at least 2-4 times in 2022. Rising oil prices could mean inflation remains higher for longer and add to pressure on the Federal Reserve to hike interest rates even more aggressively.

Inflation was already on the rise at the beginning of 2022 as a result of a slowdown in the global supply chain as nations came out of Covid lockdowns.

Russian oil sanctions imposed by the West are already clouding the situation. On September 02, the G7 nations agreed to implement a price cap on oil imports from Russia in a bid to cut off a major source of funding for Moscow's military action in Ukraine.

The drop in crude prices has given some relief to the Indian economy. Low oil prices also pushed Indian equity markets higher in July and August. The recent supply cuts could increase inflation, change the RBI's projections for inflation, and lead to additional rate hikes.

On September 30, the RBI raised interest rates by 50 basis points (bps), representing the fourth consecutive rate hike as policymakers increased efforts to reduce inflation. The repo rate now stands at 5.90%, up from 5.40%. The RBI has raised interest rates by 190 basis points (bps) so far in 2022.

Meanwhile, the Indian rupee, which is currently trading at an all-time low of 82 against the dollar, will come under additional pressure as a result of high oil prices. The value of the Indian rupee relative to the US dollar has declined by 9.72% so far this year.

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First Published: 06 Oct 2022, 08:14 AM IST