Officials at OPEC and its key allies on Monday agreed to cut oil production by a modest 100,000 barrels a day.
The trim is so small – about a tenth of a percent of world production – that it will have little practical impact on supplies. But it is likely to be interpreted by oil markets as signaling a new direction after more than a year of gradual increases. Futures prices for Brent crude, the international benchmark, rose 3.8 percent on Monday to about $96.30 a barrel.
In a press release, the group announced that the increase in production on the same scale in September was only planned for one month. It added that “higher volatility and heightened uncertainties” require “continuous assessment of market conditions and a willingness” to make immediate adjustments to production.
By cutting production, even by a small amount, OPEC Plus is demonstrating that it is willing to shrug off pleas from the Biden administration, which has been pushing Saudi Arabia, the United Arab Emirates and other producers to increase production , to help lower oil and gasoline prices in part to avoid a backlash to higher energy prices as a result of the war in Ukraine.
The cut “presents a confrontation in terms of Western developed countries’ expectations of the Gulf,” said Richard Bronze, head of geopolitics at Energy Aspects, a market research firm.
OPEC officials, led by Saudi Arabia, have expressed concern over the recent drop in oil prices. “They are determined to prevent prices from falling too far,” Energy Aspects said in a statement to customers.
Two great unknowns haunt the market. One is how long renewed Covid lockdowns in China, the world’s largest oil importer, will continue to affect demand there. The second is whether an agreement will be reached on Iran’s nuclear program, which could eventually bring significant amounts of new Iranian oil onto the market.
Saudi Arabia, chairman of OPEC Plus, recently reminded markets that it stands ready to intervene if it sees the risk of price falls spiraling out of control. Saudi Arabia is also sending a signal to the Biden government that the kingdom is ready to take steps, such as a production cut, that could forestall downward pressure on oil prices from a nuclear deal with Iran.
The OPEC Plus decision is more of a signal to the markets. The oil production quotas of many members of the group differ greatly from what those countries actually produce.
For example, while oil production in Russia, a member of OPEC Plus, has held up better under sanctions than many forecasters predicted, the country was about a million barrels a day behind target in July, according to estimates by the International Energy Agency.
In July, OPEC Plus was almost three million barrels a day below its combined targets, according to the IEA. Such deficits are likely to continue in the coming months as sanctions against Russia tighten and other countries such as Nigeria and Angola are unable to meet their quotas due to lack of investment and operational constraints.