Date first published: 11/04/2023

Key sectors: oil and gas

Key risks: inflation; supply deficit; political tensions


Risk development:

On 2 April Saudi-led OPEC+ stunned global markets by announcing voluntary cuts totalling 1.2m bpd. Cuts will be effective from May and will last through end-2023, depending on global economic conditions. Oil markets responded to the OPEC+ cuts with an 8 per cent jump in oil prices.

Why it matters:

Goldman Sachs and Bank of America forecasted that Brent crude – the global oil benchmark – would reach between US$90 -US$95 per barrel by end-2023. Economic stability for oil producing countries will come at the expense of higher oil prices leading to further inflationary pressure impacting financial markets. In this scenario, central banks such as the United States (US) Federal Reserve will be left with little choice but to further hike interest rates resulting in slower economic growth and recovery.

The announcement was unexpected and did not result from a regularly scheduled OPEC+ meeting. Instead, these cuts were announced by Riyadh and were followed by Iraq and the United Arab Emirates (UAE) without warning to other members. Riyadh alone pledged the biggest cut of 500m bpd representing around 5 per cent of its total production. The move sent a strong political message to the US, that Riyadh is interested in pursuing a different energy strategy to Washington. US relations are likely to suffer further strain following the announced cuts.

The cuts caught global markets by surprise after Saudi Oil Minister Prince Abdulaziz bin Salman reassured that a cut of 2m bpd agreed in October 2022 was ‘here to stay for the rest of the year’. Further adjustments could be made should oil prices decrease again.


Riyadh justified the cuts as a ‘precautionary measure’ aimed at supporting market stability amid recent turmoil in the banking sector and an expected downturn in oil demand in H2 following strikes in France and the closure of four crude distillation plants with a combined capacity of 1.15m bpd in South Korea and Japan. Following the collapse of Silicon Valley Bank (SVB), oil prices dropped to US$70 per barrel – the lowest recorded in 15 months.

The output reduction shows Riyadh’s determination in keeping oil prices to around US$90 per barrel. Such unwritten policy reflects what analysts labelled as ‘Saudi First’ economic policy aimed at prioritising Saudi interests in times of growing economic uncertainty. This policy puts an end to the ‘oil for security’ bargain between Riyadh and the US amid Washington’s shift away from the Middle East. Some analysts perceive the production cut as a sign of growing Saudi independence from the US while its relationship with Beijing gains increasing weight.

Furthermore, the willingness to maintain high oil prices showcases Saudi’s reliance on oil revenues to fund Vision 2030 – an expensive makeover of the kingdom to focus on developing its infrastructure and reinforcing investment activities in the country.

Risk outlook:

Despite OPEC+ having a history of issues with compliance and a failure to meet production cuts, the member-states complied with the October 2022 supply targets in February, suggesting that there is consensus on adhering to the most recent collective output agreements.

Furthermore, the International Energy Agency (IEA) issued a statement on 3 April announcing that OPEC+ cuts would add pressure to the existing risk of a medium-term global oil supply deficit in the wake of China’s impending economic boom.