OPEC Production Cut Presents a Complex Scenario for Latin America

On April 3, 2023, OPEC unexpectedly announced a 500Mb/d cut in oil production for the rest of 2023, starting in May. This cut is expected to increase tensions between Saudi Arabia and the US, driving up inflation.

While the US has condemned Saudi Arabia’s decisions over these cuts, the country has not yet released any measures against the oil country. What is more, on the back of high oil prices and geopolitical tensions, the US has laxed the sanctions imposed on Venezuela many years back.

According to Bloomberg, although many banks, including Goldman Sachs and RBC, have raised their forecasts for oil prices, many operators believe that other economic factors will prevent prices from rising, as demand indicators remain concerning.

Moreover, the turmoil over price increases driving up inflation has left central banks to implement measures amid uncertainty and projections of higher energy demands. The latest production cut announced by OPEC will take effect in May, but its effects could be felt until 2H23. However, speculation alone could drive up prices and inflation. Similarly, oil demand is expected to increase due to seasonal demand related to the summer climate in the US. Additionally, it is anticipated that China's full economic reopening will happen in 2H23, resulting in increased oil demand.

The decision to cut production could indicate that OPEC expects demand to be slower due to the economic downturn. Similarly, the US has reported a slowdown in refining, while refined products have not seen significant increases in the face of oil production cuts and potentially higher prices, adding to skepticism over greater oil demand.

The current scenario could draw more attention to the Latin American oil market. In recent years, the US has developed oil supply chains in Latin American countries, while OPEC countries have mainly directed their exports to Asia. Mexico, Colombia, Brazil, and Ecuador are the top Latin American crude oil suppliers to the US, with Mexico being the number one supplier.