Cautious optimism over oil output cuts

By Sajeev K Peter

As Kuwait begins to slash oil output by 128,000 barrels per day from Monday (May 1) in line with a wider OPEC+ decision, oil industry analysts are cautiously optimistic that the measure is expected to have positive ramifications for the country. The cuts starting from May and lasting until the end of 2023 are expected to sharply tighten the oil market, fueling a spike in demand and prices from May onwards. Some analysts even bet that crude oil prices could even bounce back to $100 per barrel in the coming months.

Given the present supply-side constraints, the output cuts might lower growth for the GCC region in the near term, but will have a positive outcome on fiscal and external positions as high oil prices could offset the impact of lower growth.

The OPEC+ grouping agreed to slash its oil production by about 1.66 million barrels per day. The production cuts are aimed to support oil prices which lost about 20.6 percent of its value in one year from April 5, 2022 to April 5, 2023. The cuts are also expected to mitigate the impact of a sluggish global economy and the fallout of the banking crisis in the US on crude oil prices.

Oil Minister Bader Al-Mulla stated in early April that the voluntary cut is a precautionary measure, in addition to the reduction in production agreed at the 33rd OPEC and non-OPEC ministerial meeting on October 5, 2022.  Immediately following the announcement of the cuts, the global benchmark Brent jumped by more than 5 per cent to hit $84.13 per barrel, one of the sharpest price spikes in the past 10-11 months.

No doubt, the cut is a legitimate defense of the oil producing countries as oil is the primary source of their hard currency. For Kuwait, a decline in oil prices is hard, as the country is heavily dependent on oil and oil revenues fund around 90 percent of Kuwait’s public expenditure. It may be recalled that oil prices dropped by about 20 percent between the beginning of the last fiscal year and the current one. According to a report released by Al-Shall, Kuwait’s oil production fell by about 9.4 percent during the same period while public expenditure increased for the current fiscal year by 11.7 percent.

According to official estimates, Kuwait’s oil production rose to a five-year high of 2.82 million barrels per day in the third quarter of 2022, but the output fell to 2.68 million bpd in February 2023. This will further drop to 2.55 million bpd once Kuwait begins to implement the OPEC+ decision to deepen pre-existing cuts for the whole of 2023. The Kuwait Petroleum Corporation (KPC) had announced its intention to increase oil production capacity to 4.75 million barrels per day by 2040.

Saudi Arabia will effect a voluntary reduction of 500,000 bpd, Iraq 211,000 bpd, United Arab Emirates 144,000 bpd, Kuwait 128,000 bpd, Algeria 48,000 bpd, Oman 40,000 bpd, Kazakhstan 78,000 bpd, and Gabon 8,000 bpd. Russia has agreed to a voluntary adjustment of 500,000 bpd to last until end-2023.

There is no issue of supplies at the moment and global crude oil production averaged at 100 million bpd in 2022 and is expected to hit 101.5-102 million bpd in 2023, while oil supply stood at 101.5 million bpd in February 2023. Platts Analytics expects global oil demand to expand by 2.5 million bpd in 2023. The estimates assume an annual average Dated Brent price of $90pb for 2023 countering arguments that the OPEC+ decision will trigger consumer inflation in several consumer countries.

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