Oil price jumps amid production cuts

It seems like bad news for consumers shortly before Easter. Oil prices are likely to rise again since major oil producers have announced they will significantly reduce their production starting in May.

Saudi Arabia's Ministry of Energy explained that the cut was being coordinated with some members of the Organization of the Petroleum Exporting Countries (OPEC) and nonmembers, called OPEC+. Which countries exactly was not mentioned. Russia, for example, is not part of the oil cartel, but is part of the OPEC+ countries.

In February, Moscow announced that it would limit its production from March. More recently, Russian Deputy Prime Minister Alexander Novak was quoted as saying that his country would extend the voluntary 500,000-barrel production cut until the end of the year.

This is all in reaction to price caps for Russian oil that the EU, the G7 and Australia have put in place. The additional cut in production by OPEC+ basically plays into Russia's hands. If prices rise as a result, Moscow will be able to bring in more revenue and thus refill its war chest.

"The big question is: Are these price increases really sustainable?" said David Kohl, the chief economist at Swiss private bank Julius Baer. According to his analysis, there is a general lull in oil demand and OPEC is just adjusting its production. If that is the case, then price increases would be of a more short-term rather than long-term pattern.

How long will oil prices hover around $80

At the start of trading at the beginning of the week, prices on the international oil markets made a significant leap upward. A barrel of North Sea Brent at times jumped by more than 6%. While the Brent price was constantly below $80 (€73) in the past week of trading, it cost over $84 on Monday morning. Some analysts believe that prices could continue to rise in the coming weeks.

The announced supply cuts will mostly come from Saudi Arabia. If the OPEC+ plan is fully implemented it would further tighten an already fundamentally tight oil market, says Jorge Leon, Rystad Energy's senior vice president. This would drive "the Brent benchmark toward $100 per barrel sooner than previously expected and would push the price to around $110 per barrel this summer," he wrote in a statement to clients.

Such increases would end the trend of the past few months where oil and energy prices have come down from their highs last year. This was partly due to comparatively low demand as a result of the weakening global economy in recent months.

In China in particular, many had expected the economy to pick up more quickly after Beijing lifted its strict COVID-19 restrictions. However, this boom in demand did not materialize, and the Chinese economy is on a path of moderate growth at the moment.

"There has been quite a lot of speculation in the market that the price will fall further because of these fundamental developments. OPEC has reacted in order to keep prices higher," said Kohl. From this perspective, stable prices can be expected. This would also correspond to OPEC's justification for the production cuts — that it is a precautionary measure aimed at stabilizing the overall oil market.

Higher oil prices and inflation

For many economies, increasing oil prices would not be good news. They would drive up the costs for consumers and companies alike. Consumers are already struggling with high prices and companies with rising costs in corporate financing.

In the fight against inflation, central banks have been increasing interest rates and that makes loans more expensive. According to the latest data from the European Central Bank, credit financing for companies in the eurozone increased by 22 basis points to 3.85% in February. In the past year, interest rates on corporate loans have roughly doubled.

Global oil demand and prices have been on a rollercoaster for a while. Deutsche Bank analysts said in a note to clients that it'll "take some time to see exactly how rising interest rates impact global prices as demand concerns linger."

Consumers will also have to dig deeper into their pockets, at least in the short term, if they want to fill up their cars at the pump or replenish heating oil supplies. "Of course, the global shortage means that heating oil customers will probably see prices rise again in the next few weeks," said Lundquist Neubauer from Verivox, an online price comparison portal.

The comparison portal calculated that this past winter brought considerable additional costs with it. Despite comparatively mild temperatures in Europe, last winter was the most expensive heating winter of all time. While German gas customers had to spend around 20% more for a heated home, customers using oil heating had to shell out an additional 18% to keep warm.

This article was originally written in German.