OPEC+ announced a much larger-than-expected production cut. The recommendation from the panel of OPEC+ ministers for the 2M bbl/day cut was ratified by the full meeting on Wednesday, October 5. The OPEC+ coalition said the production cut, from 43.8 million barrels a day to 41.8 million, would take effect in November. It is the first time OPEC has cut oil production targets since the beginning of the Covid-19 pandemic in March 2020, although the coalition has been undershooting its target by 3 million barrels a day this year.

Although, the proposal could have a smaller effect on global supply than the headline number would indicate because several countries already are pumping well below their quotas. The cartel in fact enacted the current specific market situation, where Russia being under sanctions suddenly faced significant excess oil export capacity. The supply-demand picture was relatively tight even before this announcement. More recently, prices for oil and natural gas pulled back as central bank tightening increased the likelihood of a recession.

It's important to note that oil demand doesn't drop all that much during recessions: In 2009, the year when the Great Recession had the largest impact on the global economy, oil demand dropped by 1.2 million barrels per day. That was an especially harsh and deep recession on a global scale, and yet, it only left a minor dent in global oil demand.

The production cut was seen as a rebuke to U.S. President Joe Biden, who visited Saudi Arabia in July in what now has turned out to be a futile effort to persuade the world’s second-biggest oil producer to refrain from cutting production. Biden can still release extra oil from the SPR — and I expect him to do so in response to the OPEC+ move. According to Bloomberg, the expected amount would be smaller than this year’s, which since early June has averaged about 850,000 barrels per day.

Due to those SPR releases, the reserve has shrunk significantly. As of last week, it contained 416 million barrels, the lowest amount since July 1984. By the time the White House completes the current round of releases, probably in early December, the reserve will have fallen to about 380 million barrels.