Will OPEC+ Supply Cuts Drive Us Into a Global Recession?

The International Energy Agency said on Thursday that OPEC+’s agreement to reduce supply last week has increased prices and placed the world economy at risk of recession.

The Paris-based organization, made up of the United States and other major oil consumers, said that the persistent decline in the global economy and higher prices brought on by an OPEC+ deal to reduce output reduced global oil consumption. It noted in its monthly oil report that unrelenting inflationary pressures and interest rate rises are taking their toll. Increased oil prices may prove the tipping point for a global economy already on the verge of recession.

The agency’s warning reveals a divide with Saudi Arabia, the leading oil exporter and de facto head of OPEC.

What to Expect Next?

After the OPEC+ action, U.S. President Joe Biden threatened undefined “consequences” for ties with Saudi Arabia. This is while Riyadh dismissed the criticism and said the move was political-free and intended to balance the market and reduce volatility. The IEA predicted actual supply losses rather than the 2 million barrels per day stated by the OPEC+ group. This brings together the producer club and allies like Russia, which will likely be closer to 1 million barrels per day.

According to the IEA, Saudi Arabia and the United Arab Emirates will provide the majority of the cutbacks due to capacity limitations that are limiting output in other OPEC countries. This is while new G7 and European Union sanctions against Russia might further constrict world supply.

This month, the EU supported the G7 club’s proposal to restrict the price of Russian oil exports as part of a complicated new set of international sanctions meant to deprive Moscow of funding for its invasion of Ukraine. However, any significant disruption to Russian oil exports, especially to non-EU and non-G7 clients, may drive up global prices and cause economic hardship for those in the penalizing nations who already face high inflation and cost of living.