Have OPEC+ Cuts Boosted Oil Prices?

Despite the best efforts of OPEC+ oil giants such as Saudi Arabia and Russia, prices for crude remain disappointingly low. The coronavirus pandemic, coupled with the strength of the North American shale industry, has prevented production cuts from boosting market prices. A recent paper published by the European Central Bank claims the downward trend reflects the lack of influence OPEC+ has on the oil market.

“We find the impact of OPEC+ on the market was overall quite limited, owing to significant deviations from the assigned quotas. On average, without the OPEC+ cuts, the price of oil would have been 6 percent (4 USD) lower,” reads the abstract.

The paper argues that while OPEC+ sanctions did correspond with a peak in oil prices between 2017 and early 2020, other factors such as an increase in demand for oil could have played a role. The authors also explore the idea that oil prices may have organically climbed without the assistance of OPEC+ cuts.

Production cuts fail to support crude recovery

The production cuts mark a drastic shift in strategy since March, when Saudi Arabia and Russia engaged in a price war and flooded global markets with oil. After the coronavirus pandemic took hold prices spiralled, with American futures falling into negative territory in April. In response to the historic lows the Saudis and Russians agrees to slash production. While the intention was to support an oil price recovery the latest data suggests the strategy has been ineffective.

Following the oil price crash in March and April OPEC+ agreed to cut production by a record 9.7m barrels per day. This represented around 10% of total global supply. After markets started to recover in summer the cuts were eased by 2m barrels per day.

OPEC+ struggles to enforce compliance

While the cuts are designed to boost prices and support all OPEC+ producers, not all member support the sanctions. Enforcing compliance has proven difficult, with some countries unwilling to sacrifice profits for the greater good.

“Negotiations among OPEC+ members is reminiscent of textbook game theory at work — the group as a whole benefits if it agrees to make cuts, but each individual members would prefer if someone other than itself made the cuts,” explains Manish Raj, chief financial officer at Velandera Energy. “Kazakhstan, Iraq, Nigeria and Russia are notorious for agreeing to cuts, but not honouring them.”

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