Over the weekend, OPEC+ (includes Russia) announced it was cutting aggregate output by 1.1 million daily barrels, or about 1% of current daily production of around 100 million barrels. Half the reduction will come from Saudi Arabia.
The world price of crude jumped by 5% or so on the news, to around $80 a barrel for the best grades. So too did the stock prices of publicly-traded oil producers in yesterday’s trading on Wall Street.
The move won’t bring in extra revenue for Saudi Arabia, since it is reducing its output by about 5%. Other members of OPEC stand to benefit. And perhaps the higher price will make Russian crude more attractive. I’m assuming here that the Western boycott of Russian crude has mostly reduced price rather than output.
Why raise the price? Why now?
The now is easy. Demand for oil is at a seasonal low point, between the end of winter demand for fuel and before the start of the Northern Hemisphere (mostly North American) driving season. So the price is relatively easy to move.
As to why, my guess is that it’s to prevent the price from falling further. If so, it’s a sign of weakness rather than strength.
It will be interesting to watch the trading in oil stocks over the next few days. The rise in Exxon Mobil (XOM) and Chevron (CVN), the last of the oil majors to remain oil companies rather than energy firms–and therefore the biggest beneficiaries of a price hike–seems excessive to me. This may be short covering or simply news reading trading bots. It will be interesting to see if there’s any followthrough over, say, the coming month. My guess is there won’t, but the oil sector is so small and idiosyncratic that I haven’t really kept up with it for years. So I’m not going to act on my thought.
An aside: to me, the most interesting question in this whole sector is what will happen to gas station chains as the US electrifies.