Quick Bite: Crude Oil Slides on Economic Uncertainty
Author: Paul Zwi
OPEC+ (a group of 23 oil-producing countries that work together to manage production and stabilise prices) said it will proceed with a plan to increase oil production from April, in an unexpected move by the cartel that sent crude prices tumbling.
Saudi Arabia and 7 other members of the OPEC+ group had previously delayed a plan to unwind long-standing output cuts several times, and traders had widely expected it to be postponed again.
But OPEC+ said it had agreed to proceed with the “gradual and flexible return” of 2.2 million barrels a day of oil production over the next 18 months.
The price of Brent crude fell by 2% to less than $72 a barrel, the lowest level in almost three months, following the OPEC+ announcement, as traders responded to the prospect of increased supply.
Source: Yardeni Research
Concerns about the potential impact of US tariffs on economic activity were already weighing on crude prices, which are down more than 10% from a high this year of $82 a barrel in January.
President Trump confirmed last week that the US would impose 25% tariffs on goods imported from Canada and Mexico. Two things are hitting the market at the same time: Trump’s tariffs and the OPEC+ restart of halted production. It is no surprise that this creates a sell signal to traders.
Global Economic Uncertainty on the Rise
Source: Bloomberg
Trump called on OPEC+ to push down oil prices during a speech in January at Davos. OPEC+ had initially intended to begin unwinding the group’s output cuts in September but delayed the plan numerous times.
The 8 countries that will increase production from April are Saudi Arabia, Russia, Iraq, the United Arab Emirates, Kuwait, Kazakhstan, Algeria, and Oman.
All other existing production cuts would remain in place, a statement by OPEC+ said. “This gradual increase may be paused or reversed subject to market conditions…This flexibility will allow the group to continue to support oil market stability”.
Three different sets of output cuts mean OPEC+ members are producing almost 6 million barrels per day (mn b/d) less than their combined capacity, representing about 6% of the global oil supply.
Saudi Arabia has shouldered most of the cuts to date, reducing its own production by 2mn b/d in the past 2 years. The policy has at times inflamed tensions with the US, which tried and failed to get Riyadh to boost production in 2022 after Russia’s invasion of Ukraine sent oil prices soaring. Saudi officials were ready to bring back production, even if it led to a prolonged period of lower prices.
The outlook for supply and demand meant there was space for OPEC+ to gradually add to production, with the prospect of oversupply only emerging towards the end of the year – at which stage the group may choose to pause.
Economic policy uncertainty is keeping a lid on crude at a time when demand and supply trends were already on the wane.
