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Oil price drops as economic fears outweigh OPEC+ cuts

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After an initial rise in oil price earlier in the week, prices inched lower yesterday as the market weighed worsening economic prospects against expectations of United States crude inventory declines and plans by OPEC+ producers to reduce output.

Opec+ is a group of 23 oil-exporting countries which meets regularly to decide how much crude oil to sell on the world market.

Brent crude futures fell 49 cents or 0.6 percent to $84.45 a barrel yesterday, while West Texas Intermediate fell 58 cents or 0.7 per cent to $80.13 a barrel.

This week prices were underpinned by voluntary production cuts of about 1.66 million barrels per day (bpd), thereby increasing the organisation’s total cut to 3.66 million bpd pledged by OPEC+ members.

“Maybe following the strong price rally this week, investors are a bit cautious on jumping on a strong report,” said UBS analyst Giovanni Staunovo.

“The present raises concerns about healthy economic expansion as Chinese, euro zone and U.S. manufacturing activity slowed last month,” said Tamas Varga of oil broker PVM.

Record Russian diesel flows to the Middle East in March and the sluggish performance of middle distillates contracts have “acted as a brake on any attempt to push crude oil prices meaningfully higher”, Varga said.

The unexpected cut announcement saw Saudi Arabia and other OPEC+ oil producers voluntarily say they will cut their production capacity beginning from next month to around 1.15 million bpd in order to support market stability.

Last October, OPEC+ agreed to output cuts of two million bpd from November until the end of the year.

A breakdown of the latest production cut, which begins in May, will see Saudi Arabia cutting its output by 500,000 bpd; Iraq will reduce its production by 211,000 bpd; the UAE will cut its output by 144,000 bpd; Kuwait will reduce by 128,000 bpd, while Oman will cut down production by 40,000 bpd.

Others are Algeria, cutting output by 48,000BPD; Kazakhstan will also cut output by 78,000 bpd; and Russia cutting by 500,000 bpd until the end of 2023. These cuts represent 3.7 percent of global oil demand.

Kpler crude analyst, Johannes Rauball, said: “The decision by OPEC+ to voluntarily cut crude supplies from May onwards has come as a surprise to many, considering that the global crude balance was already expected to become increasingly tight over the summer months, something that will certainly help keep crude prices supported”.

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