Fears grow over oil price as Opec+ agrees to bigger than expected output cuts

<span>Photograph: Hasan Jamali/AP</span>
Photograph: Hasan Jamali/AP

The Opec oil cartel and its allies have agreed to a bigger than expected cut in oil production targets despite significant pressure from the US.

The Opec+ group of oil-producing nations signed up to a cut in output of 2m barrels a day, surpassing predictions earlier in the week of cuts of 1m to 1.5m barrels, squeezing supplies in a tight market.

The decision, led by Saudi Arabia and Russia, sent the price of Brent crude up 2% at $93.80, its highest since 15 September.

Joe Biden’s administration had hoped to persuade Middle Eastern nations not to curb supplies, which could further increase fuel prices and add to soaring inflation.

Asked about the Opec+ decision on his way to inspect hurricane damage in Florida, Biden said he found it “unnecessary”.

A statement from the national security adviser, Jake Sullivan, and the director of the National Economic Council, Brian Deese, said the president was “disappointed by the shortsighted decision … while the global economy is dealing with the continued negative impact of Putin’s invasion of Ukraine”.

Founded in 1960, the cartel of the world’s biggest oil producers emerged as a political and economic force with the 1973-74 US oil embargo, which caused oil prices to spike. The club consists of 13 countries, with Saudi Arabia the biggest producer, followed by Iraq and Iran.

In response to the 2014-16 oil price slump, Opec partnered with Russia in December 2016 to agree a cut in production of 1.8m barrels a day. That curb, the first of its kind in 15 years, drove up the price of oil. In May 2017, the cuts were extended until the end of March 2018.

Opec's official members are: Algeria, Angola, Ecuador, Equatorial Guinea, Gabon, Iran, Iraq, Kuwait, Libya, Nigeria, Republic of the Congo, Saudi Arabia, the United Arab Emirates and Venezuela. Indonesia and Qatar's membership has lapsed.

The Opec+ group, sometimes known as "Vienna Group", adds 10 non-member nations, including Kazakhstan, Mexico and Russia. Between them these nations supply 55% of oil production and hold 90% of the planet's oil reserves.

They said the Opec+ decision “will have the most negative impact on lower- and middle-income countries that are already reeling from elevated energy prices”.

In response, they said, Biden had ordered a further 10m barrels from the US Strategic Petroleum Reserve to be put on the market next month, following earlier releases in March, and he said he could order a further increase in supply.

Although oil prices have fallen from the highs of about $130 a barrel seen earlier this year when Russia’s invasion of Ukraine tightened supplies, motorists in the UK and the US have still experienced high prices at the pump, exacerbating the cost of living crisis.

Opec+ has in recent months failed to achieve its planned output increases owing to underinvestment in oilfields by some Opec members and by losses in Russian output.

The invasion of Ukraine has upended world oil markets, with western nations shunning Russian oil and exporters in Russia instead increasingly shipping to India and China.

Oil use has rebounded from the lows of the pandemic, although high prices and Chinese coronavirus outbreaks have hit 2022 growth projections.

Democratic pundits suggested that the production cut represented an “October surprise” by Crown Prince Mohammed and his close ally, Donald Trump.

The decision also undermines Biden’s strategy of putting economic pressure on Russia, which is heavily dependent on oil revenues for pursuing its disastrous invasion of Ukraine.

The Biden administration had tried an eleventh-hour lobbying effort in the Gulf to forestall the cut, which is twice as big as what the White House feared.

In the UK, the rise in the oil prices will reheat concerns among drivers over the cost of filling up at the pumps.

RAC fuel spokesman Simon Williams said: “Such a deep oil production cut will inevitably see oil prices rise, forcing up the wholesale cost of fuel.

“The question is when, and to what extent, retailers choose to pass these increased costs on at their forecourts. Despite three straight months of pump prices coming down, we believe that in many cases drivers are being charged more to fill up today than they should be based on average wholesale prices over the last few weeks.”

Jamie Maddock, equity research analyst at investment firm Quilter Cheviot, said: “We are currently witnessing a globally coordinated strategic oil reserve release, predominantly from the US, that aims to push the price of oil down and help consumers at a time when inflation has surged and the cost of living has intensified.

“This is ongoing, but this new cut in supply could mean that the benefits of this programme are negated if this move is fully implemented.”

Maddock said prices could also rise again later this year as a result of a ban by western nations on shipping Russian crude oil from 5 December.

The Opec+ meeting took place in person in Vienna for the first time since March 2020, when the Covid pandemic forced it online, after a last-minute switch.