opec oil production cut

OPEC+ (Organization of Petroleum Exporting Countries) has announced a massive 2 million bpd (barrel per day) production cut as global crude oil prices have fallen steeply from their 2022 highs amid concerns over global demand.

The block was expected to announce a production cut between 500,000-2 million bpd for November. OPEC+ cut its production by a massive 10 bpd in early 2020 as oil prices plunged amid the COVID-19 lockdowns.

It has since been increasing production amid the gradual recovery in global oil demand. However, OPEC surprised markets by announcing a 100,000-bpd production cut for October. Markets were expecting OPEC+ to hold its production at previous levels only.

Earlier this year, oil prices rose to their highest level since 2008 after the Russian invasion of Ukraine. Prices have since come off their highs as markets are concerned about the outlook for oil demand. OPEC+ also attributed its production cut to “uncertainty that surrounds the global economic and oil market outlooks.”

Oil prices have recovered somewhat after the OPEC+ production cut announcement. We have a guide on how to trade in oil.

Biden is “Disappointed” after OPEC Oil Production Cut Announcement

After the OPEC+ announced the oil production cut, National security adviser Jake Sullivan and National Economic Council Director Brian Deese said, “The President is disappointed by the shortsighted decision by OPEC+ to cut production quotas while the global economy is dealing with the continued negative impact of (Russian President Vladimir) Putin’s invasion of Ukraine.”

The White House release added, “In light of today’s action, the Biden Administration will also consult with Congress on additional tools and authorities to reduce OPEC’s control over energy prices.”

It also said that the US would release another 10 million barrels from the SPR (strategic petroleum reserve) next month. Biden has been gradually releasing oil from the country’s strategic reserves in order to tame high gas prices.

Earlier this year, Biden announced a 180-million-barrel oil release from the SPR which is the biggest drawdown in history. The 1-million barrel per day release began in May and was to last until October but Biden has since extended it to November.

Biden Has Tried to Cajole OPEC to Increase Production

Biden has unsuccessfully called upon OPEC, especially Saudi Arabia to increase oil production. The President even traveled to Saudi Arabia as part of his visit to the Middle East. The visit had irked some in the Democratic Party due to the country’s alleged involvement in Jamal Khashoggi’s killing.

The President has also called upon US energy companies to reduce gas prices, pointing to the higher spreads between oil and gasoline prices. However, the Biden administration has had a tumultuous relationship with the US oil and gas industry.

Unlike Donald Trump, who relaxed policies to spur US energy production and exports. However, the Biden administration is working on pivoting towards green energy. It has taken several decisions like the cancelation of Keystone XL Pipeline and gas leases on federal land, which have not gone well with the US energy industry.

The pivot toward green energy would meanwhile help the country lower its emissions and address climate change. Investing in clean energy has emerged as an attractive investment proposition as countries globally are encouraging the green energy transition.

Oil Stocks Rallied after Production Cut Announcement

Oil stocks rallied yesterday after the OPEC+ production cut announcement. Some renowned fund managers like Warren Buffett and Stanley Druckenmiller have loaded on energy stocks this year.

Buffett has invested billions of dollars in buying oil stocks this year. He has added 5.99 million Occidental Petroleum which has lifted Berkshire Hathaway’s stake in the company to 20.9%.

In 2019, Berkshire Hathaway chairman Warren Buffett invested $10 billion in Occidental Petroleum to finance its acquisition of Anadarko Petroleum. In the typical Buffett way, he invested the money in preferred stocks which carry an 8% yield. The preferred stocks also have convertible warrants attached to them.

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