Explained: Factors shaping Saudi Arabia and OPEC+’s decision to cut crude oil output?

Starting May 1, Saudi Arabia and other OPEC+ members will voluntarily cut oil output by around 1.16 million barrels per day. A “precautionary measure,” Saudi Arabia said is aimed at stabilising the oil markets. Not just Saudis, Russian Deputy Prime Minister Alexander Novak also announced the country’s decision to reduce oil production by half a million barrels per day until the end of the year.

“The move comes on the back of Russia’s decision to trim oil production by 500,000 barrels per day until the end of 2023, according to the country,” news agency Reuters quoted Novak as saying. 

The oil cartel’s announcement helped push Brent crude futures over 5 per cent to $83.95 a barrel, while the US West Texas Intermediate (WTI) crude futures soared 5.2 per cent to $79.64 a barrel.

What is OPEC+?  

Formed in 1960, the Organization of the Petroleum Exporting Countries has 13 member states that hold more than 30 per cent of the world’s proven oil reserves. And OPEC+ is a larger group which includes Russia, Azerbaijan, Bahrain, Brunei, Kazakhstan, Malaysia, Mexico, Oman, Russia, South Sudan, and Sudan. OPEC + produces about 80 per cent of the world’s crude oil and its members’ exports make up around 60 per cent of the global petroleum trade. OPEC+ aims to regulate global oil prices by coordinating reductions or increases in production.

Why is OPEC+ cutting oil output?  

Saudi Arabia and 12 other members of the OPEC+ oil producers announced voluntary cuts to oil production to support the stability of the oil market. Simply put, it means the oil cartel wants to artificially boost demand by reducing supply. Not just Saudi and Russia, other major oil-producing countries such as Kuwait, the UAE and others announced their respective cuts. The UAE said it would cut production by 144,000 bpd, Kuwait announced a cut of 128,000 bpd, Oman announced a cut of 40,000 bpd and Algeria said it would cut its output by 48,000 bpd. Kazakhstan will also cut output by 78,000 bpd.  

How will it affect India and China?   

The OPEC+ decision will lead to a drop in the supply of crude oil in the market. If the supply is less and demand is high then countries like India and China will have to pay higher crude prices, which will have a cascading impact on the prices of diesel fuel, gasoline and heating oil that is produced from oil and hurt the pockets of the common man. Overall, higher crude oil prices dampen the sentiment in stock markets as well. From India’s point of view, crude forms the bulk of imports and costs a significant amount to the exchequer.