OPEC+’s decision to extend oil production cuts until the end of 2024 may cause an increase in global oil prices.
Saudi Arabia, Russia, and several other oil producers from the 10-nation OPEC and its non-member partners announced in April that they would voluntarily take a total of 1.16 million barrels of crude oil per day off the market from May-December 2023 in a bid to prop up prices.
OPEC+ agreed at the meeting on Sunday to adjust their cumulative production to 40.46 million barrels per day over January-December 2024.
Russia said it would extend its voluntary production cut of 500,000 barrels per day until the end of 2024, while Saudi Arabia said it would make an extra 1 million cut to its daily production from July, on top of a 500,000 cut that was likewise extended through December 2024.
Frank Blackmore, lead economist at KPMG, told Business Report that the impact of any changes by OPEC on their production of oil (in this case, reduction) is determined by both supply and demand factors.
He says that three outcomes are theoretically possible.
Blackmore said: “Firstly, if supply is reduced in anticipation of a reduction in demand as the global economy slows down in an environment of high inflation and interest rates and those decreases are more or less the same size, then one can expect the prices of oil to remain constant. Alternatively, however, if the reduction in supply is smaller than the reduction in demand, one could expect further reductions in the price of oil, while if the reduction in supply was larger than the reduction in demand, then one could expect an increase in the price of oil.”
“A further reason for OPEC considering reducing their production of oil is that it is uncertain how much oil Russia is supplying to countries around the world, and OPEC’s desire to fix the oil price at profitable levels would require a trial and error approach of declining production to get them to such an equilibrium. The other variable in the fuel price equation is the exchange rate since we would need to pay for oil in rands exchanged for dollars,” he said.
“Again, there are three possibilities. The exchange rate could remain constant, appreciate or depreciate, resulting in a given quantity of oil imported staying the same, becoming cheaper or becoming more expensive in rand terms. Recent increases in political risk, along with the negative economic impacts of load shedding and other infrastructural challenges, have seen the rand depreciate to long-term low levels meaning that imported oil will be costing SA a lot more rands per barrel, which in itself would be inflationary if this trend continued and perhaps could be exacerbated if the price of oil were to rise further as a result of the cuts in OPEC production,” Blackmore went on to say.
Impact on consumers
“Fuel is used by all sectors of the economy for transport and generating power etc., and therefore, increases in the fuel price tend to lead to cost increases across all sectors of the economy and also impact households as people commute to and from work, school and retail centres. As a result, inflation would remain higher for longer, requiring interest rates to remain higher for longer and reducing the productive capacity and employment potential of the economy further. And with the consumer already facing many cost of living pressures, let us hope we can avoid this,” Blackmore went on to say.
Meanwhile, consumers can look forward to having some extra cash in their wallets this month after the Department of Mineral Resources and Energy (DMRE) announced that the price of both grades of petrol will decrease by 71 cents per litre from June 7, while diesel will come down by between 80 cents (50ppm) and 84 cents (500ppm).
After the adjustments take effect, you’ll pay R21.91 for a litre of 95 Unleaded petrol at the coast and R22.63 in the inland regions, where the cheaper 93 Unleaded will retail at R22.30.
The wholesale price of 50ppm diesel, meanwhile, will drop to R18.99 at the coast and R19.70 inland, although retail prices, which vary between outlets, will be a few rands higher.
BUSINESS REPORT