The 23-member Opec+ alliance agreed to slash its November output by 2 million barrels per day on Wednesday, its biggest production cut since the start of the pandemic in 2020.
The group will reduce its overall production by 2 million bpd from the August 2022 required production levels starting November 2022, Opec+ said in a statement after the group's first in-person meeting in Vienna since March 2020.
The decision was made in “light of the uncertainty that surrounds the global economic and oil market outlooks, and the need to enhance the long-term guidance for the oil market, and in line with the successful approach of being proactive and pre-emptive”, Opec+ said.
The move is the latest effort by the oil producers’ alliance to support prices as a potential economic slowdown weighs heavily on the outlook for fuel demand.
Brent, the benchmark for two thirds of the world’s oil, was up 1.64 per cent at $93.31 per barrel at 10.08pm UAE time on Wednesday. s, the gauge that tracks US crude, was trading 1.44 per cent higher at $87.77 a barrel.
Opec and non-Opec members also decided to extend their alliance until December 31, 2023, the statement said.
The group announced that the monthly Opec joint ministerial monitoring committee meetings will now be held once every two months, and that the Opec and non-Opec ministerial meeting will take place every six months, with the next one scheduled for December 4.
However, meetings can be called “at any time to address market developments if necessary”, the statement said.
"We will make sure that we have a balanced market and if we have to do more, we will do more ... We are looking at long-term," Suhail Al Mazrouei, Minister of Energy and Infrastructure, said at the post-meeting press conference.
"What is important to us is bringing the investment [and] the sustainability of this market," he said.
Opec+ is "here to stay as a moderating force to bring about stability", Saudi Arabia’s Energy Minister Prince Abdulaziz bin Salman said at the conference.
“Energy is something that can never be attended to in short-term tweaks and moves … the world energy markets need attendance, careful planning and investments.”
Oil prices, which posted their worst quarter in two years last month, rallied strongly earlier this week on expectations of the production cuts.
Since peaking close to $140 a barrel in March, prices have retreated to about $90 a barrel this October as markets grow anxious over demand conditions going into 2023.
The group's ability to make a large production cut is “entrenched in the lack of any supply elasticity”, said Ehsan Khoman, director of emerging markets research for Europe, the Middle East and Africa at MUFG Bank.
There is “negligible” spare capacity outside the core Opec producers and US shale activity is showing signs of slowing, Mr Khoman said.
A shale resurgence, centred on the Permian Basin in Texas, made the US the world's biggest producer of oil and gas in 2018.
However, a lack of capital and pressure mounted by investors seeking higher returns have prevented further output increases, despite the price surge.
“While exceptional, this cut is also logical as it maximises the group’s revenue today with minimal sacrifice of future profitability,” Mr Khoman said.
Last month, Opec and its allies agreed to modestly cut oil production by 100,000 bpd, reverting to August production levels to support prices, a move that analysts said showed the group’s willingness to take action amid rising volatility.
“The challenge in cutting output will be to avoid pushing prices up too much that it exacerbates the pending slowdown in demand growth,” Edward Bell, senior director of market economics at Emirates NBD, said in a research note.
Emirates NBD, which expects a more “interventionist” stance from the oil super group in the near term, expects Brent crude to average $105 a barrel in 2023.
It expects WTI to average $95 a barrel next year.
The Opec+ alliance agreed in the spring of 2020 to cumulatively cut crude output by a record 9.7 million bpd as it faced a coronavirus-induced crash in oil prices. The alliance then gradually unwound the cuts over the past two years.
Growing fears of a global recession, a strong US dollar, surging inflation and monetary tightening by central banks around the world have continued to weigh on the market since June.
The International Monetary Fund, the World Bank, the Institute of International Finance and the Organisation for Economic Co-operation and Development have all slashed their global economic growth forecasts for this year.
“Global rate hikes will inevitably impact aggregate demand and therefore oil consumption, too, especially in developing countries but its impact will not as severe as during the pandemic,” said Tamas Varga, oil analyst at London broker PVM Oil.
Sudharsan Sarathy, a London Stock Exchange Group analyst, said oil demand in the short term could be affected by winter heating demand in Europe and North Asia, China’s lockdowns and sanctions on Russian energy exports.