OPEC+ output cut may be smaller in effect; no impact seen on pump prices

The oil price spike triggered by the OPEC+ decision to cut supplies will be short-lived as recession fears are real and the effective production cuts could be much smaller than announced, industry executives and analysts said, adding that pump prices in the country are unlikely to show any effect.

“The supply cut decision appears more like a signal by the OPEC+ that they are in control, or they want to stay in control of the market,” said MK Surana, CEO of Ratnagiri Refinery & Petrochemicals and former chairman of

. “This would motivate the unwinding of short positions, pushing up prices in the short run. However, fears of a recession in advanced economies are likely to keep prices under check in the medium term.”

Oil has gained $4 to touch $93.5 per barrel since the OPEC+ decision on Wednesday to cut supply by 2 million barrels per day, equal to 2% of global supplies, from November. Some analysts do expect the curbs to send oil back to above $100 quickly, many others are sceptical about any durable impact on prices as the effective supply cut is expected to be much smaller.

Since OPEC+ members have been missing their production quotas for months, the amount of oil that may actually go out of the market would be roughly 800,000 barrels per day, primarily borne by Saudi Arabia and the UAE, according to S&P Global Commodity Insights.

“Assuming the OPEC+ decision is a price support mechanism, crude prices are more likely to remain in the range of $80-90 rather than continuing above $90 per barrel in the medium term with momentary spikes based on daily news flow and responses,” said Surana.

OPEC+, the group of nearly two dozen producing countries led by Saudi Arabia and Russia, controls about 40% of global supplies. The pursuit of higher prices has strengthened the producers’ alliance amid the West’s efforts to strangle the Russian economy by reducing its energy revenue.

The European Union‘s proposed ban on Russian crude imports from December could be disruptive, induce more volatility in the market and push up prices, another executive at a state refiner said. “The G-7 countries’ proposal to impose a price cap on Russian oil may be hard to implement but can add to uncertainty and price volatility,” he said.

Consuming countries have regularly complained about OPEC+ artificially limiting supplies and some of the big consumers led by the US have tapped their strategic reserves to increase global supply and influence prices. The release of 1 million barrels per day from the US strategic reserve is slated to end in October while the fresh supply curbs by OPEC+ would come into effect from November. And, if demand stays strong, this could help boost prices, an analyst said.