Saudi Arabia’s Minister of Energy, Prince Abdulaziz bin Salman, October 5, 2022.
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The alliance of major oil producers, OPEC+, is waiting for concrete central bank action on interest rates before considering their potential impact on the energy demand situation, according to Saudi Arabia’s energy minister.
“Central banks, with all due respect, are in a state of flux. [on their messaging]Prince Abdulaziz bin Salman made the remarks at a press conference on Sunday in response to a question about whether OPEC+ supply cuts could rekindle inflationary pressures around the world as central banks try to contain consumer price increases and cautiously move closer to cutting interest rates.
Early Sunday, the OPEC+ group — the Organization of the Petroleum Exporting Countries (OPEC) and its allies — agreed to extend official production cuts until the end of next year. Parts of the coalition will also extend voluntary supply cuts by two more stages. The eight-nation subgroup will extend cuts of 1.7 million barrels per day until 2025 and a larger cut of 2.2 million barrels per day until the end of the third quarter.
The decision on production strategy comes at a time when OPEC’s own forecasts show demand rising by 2.25 million barrels per day, according to the monthly oil market report for May. The impending summer driving season and the end of maintenance at China’s refineries are also expected to worsen crude demand in the short term.
Energy costs have soared around the world in the wake of Russia’s full-scale invasion of Ukraine, exacerbating the economic downturn following the COVID-19 pandemic. International organizations have previously cited energy prices as the root cause of inflation concerns. The resulting inflationary shock has dampened demand for oil.
As countries battle stubborn inflation, expectations are growing about the duration and number of interest rate cuts that global central banks will implement. Although euro zone inflation recently rose to 2.6% in May from 2.4% in April, the European Central Bank is widely expected to implement a much-needed interest rate cut when it meets on June 6.
The Federal Reserve had also been expected to ease policy in the short term, but a series of better-than-expected economic data and signals from policymakers have darkened that outlook.
“Among central bankers, [has] Saudi Arabia’s Foreign Minister Abdul Aziz bin Salman said the ongoing uncertainty “requires determination to show the public a trajectory on when, where and how we will lower interest rates,” stressing that the group was waiting for “more certainty on the overall economic trajectory where demand will increase on a clear path.”
The OPEC+ coalition has repeatedly said it will step in to respond quickly and flexibly to changes in the oil market if needed. On Sunday, Saudi Arabia’s energy minister defended the alliance’s latest production strategy, saying it was based on current market conditions.
“At this point, we think we need to be very clear to the market about what signals we are sending, and most importantly, for people to follow our example with what we are doing,” he said.
