A surprise OPEC+ cut

On Sunday 2 April 2023, several OPEC+ countries, led by Saudi Arabia, announced voluntary production cuts of more than a million barrels a day. The following Monday oil rose sharply, in an immediate market reaction to a decision that almost nobody had expected.

The news mattered because it came at a time when many companies and households were starting to see some easing in energy costs. A cut of this size was a reminder that the price of oil does not depend only on demand and the economy, but also on the political and strategic decisions of the countries that produce it. For anyone running a fleet, managing a factory or leading a business with heavy energy consumption, a decision taken thousands of kilometres away ends up affecting next month’s accounts.

An unexpected decision

The announcement came on a Sunday and without warning, and markets received it with an immediate rise in oil. When the big producers reduce supply, the price tends to go up unless demand falls at the same time. The mechanism is simple: there is less product available for the same buyers, and they bid higher to secure it.

The cuts were voluntary, that is, decided by the producing countries themselves rather than imposed from outside. That means they can be maintained, extended or reversed according to their interests and to how the market evolves. For anyone who consumes energy, the practical consequence is that the price can change direction with a single meeting. When the price rises quickly, those who buy fuel at market price notice it at once, while those with contracts subject to periodic review feel it with some delay, but end up bearing it all the same.

Why energy is so hard to forecast

Energy remained the hardest variable to forecast. Its price depends on political decisions, geopolitics and the economic climate, and can move within hours. That complicates the budgets of any company with significant fuel or electricity consumption, from transport to industry, by way of hospitality or retail.

In the face of that uncertainty, trying to guess the exact price is of little use. It is more practical to draw up several scenarios, one of stable prices, another of a moderate rise and another of a sharp rise, and to calculate what would happen to margins in each. That identifies in advance how much can be absorbed and at what point action is needed. Scenarios need not be sophisticated. It is enough to define a reference price, a higher one and a lower one, and to calculate in each case how much the annual cost of energy would change and how much of the result would be at stake.

How it affected companies

Companies with fixed-price contracts or hedges could look on more calmly; the rest had to budget again. Fixing the price gives predictability, though at the cost of giving up possible falls, and the decision should be weighed with the adviser according to each business’s consumption profile.

It is worth reviewing which part of the energy cost is protected, for how long and at what price, and what room to pass costs on to the customer exists if the cost rises. Measuring consumption in detail also helps: the less energy a process needs, the less exposed it is to swings in its price. It is also worth identifying which customers would accept a fuel surcharge or a rate review and which would not, because the ability to pass costs on varies greatly between sectors and, within a sector, between types of customer.

Budgeting energy with scenarios is more useful than trying to guess the price.

This article is general information. It is not legal, tax or investment advice, and it does not take anyone’s particular circumstances into account.