OPEC’s Jumbo Production Cut Might Give You A Major Clue About Oil’s Future

OPEC’s Jumbo Production Cut Might Give You A Major Clue About Oil’s Future
Paul Allison, CFA

8 months ago1 min

OPEC – the group of oil-producing nations – announced a surprise production cut of 1.2 million barrels a day over the weekend, with Saudi Arabia chopping around 5% of its output. And as you can see in the chart above, the price of a barrel of Brent crude spiked after the news broke.

That’s got pundits speculating about two potential motivations. For one, the cut could be a response to the US’s decision not to sign a deal with Saudi Arabia, one that could’ve helped America rebuild its depleted strategic petroleum reserve. And for another, it might signal a strengthening alliance against the West. After all, OPEC and its close OPEC+ friends (including Russia) are all too aware of the inflationary issues that the US and its allies are up against.

But there might be a whole different reason behind the slash. With so many countries working toward electric vehicle targets and away from crude oil-guzzling cars, OPEC countries like Saudi Arabia are in a hurry to become less economically dependent on the black stuff. But those diversification plans are costly, so ideally they’d like to sell as much oil as they can in the shortest time possible. Those countries probably wouldn’t want to cut supply, then – not least because the resulting higher prices might turn the world off fossil fuels even faster. So the fact that they are slashing supply could be a worrying sign for future demand.

So if you’re swooning at the prospect of endlessly high oil prices, you might want to take a time out before bulking up your portfolio with Big Oil shares. Oil consumption will most likely be meaningfully lower in the long term, and it might take unfeasibly hefty supply cuts to compensate for what could be permanently dwindling demand.



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