In addition to higher petroleum prices, there are concerns regarding the effect on inflation and broader concerns regarding those who will benefit, particularly the Russian president.
After Saudi Arabia and other major oil producers pledged to reduce output, oil prices increased by more than 6 percent.
Brent crude, the international oil benchmark, increased by 5.5% to $84.28 per barrel by 9 a.m. on Monday, following the announcement that production would be reduced by 1.15 million barrels per day from May through the end of the year.
The price rose throughout the day and reached $85 per barrel on Monday evening, a nearly 6.5% increase.
It follows an earlier production cut that was disclosed in October.
It will take some time for the resulting price increases to filter through to forecourts. But they will eventually exacerbate the difficulties faced by many Brits during the cost of living crisis.
Increasing energy prices will also present a challenge to central banks attempting to contain inflation.
Concerns exist that rising oil prices will bolster Vladimir Putin’s war funds as the Ukraine conflict persists.
Since Russia invaded Ukraine, several countries have reduced their energy imports from Russia. But according to the International Energy Agency (IEA), Russia continues to export crude, primarily to China and India.
Kevin Book, managing director of Clearview Energy Partners LLC, said the cutbacks could take a year.
It’s a major issue… you could see a significant price response.
However, even though the production cut represents only a minor portion of the world’s daily consumption, the impact on prices could be significant, he added.
“It is a major issue due to the way oil prices operate,” he said.
“You are in a relatively balanced market.”
“Depending on what happens to demand, a small reduction in quantity could result in a significant price response.”
Sophie Lund-Yates, the chief equity analyst at Hargreaves Lansdown, stated, “This is a setback for inflation, with expectations of a decline in inflation partially dependent on the trajectory of oil prices.
“Markets are aware that if pressure persists, central banks will need to extend or intensify their interest-rate hiking cycles, which will require repricing of expectations.”
Nigel Green, chief executive officer of deVere Group in Dubai, stated, “The drastic reduction will only exacerbate global inflationary pressures.
Oil price increases are anticipated to increase production and transportation costs, reduce the purchasing power of consumers, disrupt supply chains, and increase inflation expectations.
“There is genuine concern that Saudi Arabia’s unexpected decision for OPEC+ will prompt central banks to maintain higher interest rates for a longer period due to the inflationary impact, which will hinder economic growth.”
Stabilizing the petroleum industry
According to the Saudi Energy Ministry, the reductions are a “precautionary measure” intended to stabilize the oil market.
Iraq, the United Arab Emirates, Kuwait, Kazakhstan, Algeria, and Oman also announced cuts.
Russia will also extend a February voluntary cut of 500,000 bpd through the end of the year.
The countries are all members of the OPEC+ group, which also includes Russia.
The Organization of the Petroleum Exporting Countries (OPEC) stated after its meeting on Monday, calculating the production cuts pledged by the participating nations and adding, “The meeting noted that this is a precautionary measure intended to support the stability of the oil market.”
Later, President Joe Biden’s government revealed that Saudi Arabia had informed it of its production cut. But that it had informed officials that it opposed the move.
John Kirby, a spokesman for the National Security Council, told reporters on Monday. “We do not believe that production decreases are prudent at this time due to market volatility. We made that perfectly plain.”
