Opec+ is planning significant oil production cuts to prop up prices
The Opec+ oil alliance is planning a significant output cut to prop up falling prices, according to people close to the discussions, as the group prepares to meet in person for the first time since March 2020.
The oil group, which is led by Saudi Arabia and Russia, is expected to discuss an output cut that could amount to more than 1 million barrels per day at the meeting on Wednesday. This is by far the largest site early in the pandemic and equals more than 1 percent of global supplies.
The measure threatens to increase oil prices at a time when much of the world is struggling to bring down energy costs and could create a potential breach with the United States, where President Joe Biden has tried to lower fuel prices for motorists ahead of crucial mid-term elections next time. month.
However, two people briefed on Saudi Arabia̵[ads1]7;s thinking say that Saudi Arabia is keen to lower production both to prop up prices and to keep some production capacity in reserve. The kingdom fears that Russian production may fall sharply later this year when Western sanctions against oil exports are tightened.
Russia is also said to be in favor of a cut as it has seen oil revenues drop in recent months, with buyers forcing deep discounts on oil sales following its full-scale invasion of Ukraine. The recent strength of the ruble also reduces the amount it receives in its domestic currency for selling oil contracts primarily priced in dollars.
The international oil benchmark Brent rose by 3 percent after the news that the producer group is considering cutting supply, to 87.67 dollars per barrel. The contract remains well below the high above $130/b struck earlier this year after the invasion.
Opec+ announced this weekend that it would move the monthly meeting it has held since early in the pandemic from online to a full-fledged gathering at the group’s headquarters in Vienna, giving the impression that a significant policy shift is about to be discussed.
People close to the negotiations said the cuts could total 500,000 to 1 million b/d for the group as a whole, but Saudi Arabia could make a further unilateral output cut on top.
Amrita Sen of Energy Aspects said the group was particularly concerned about the risk of a global slowdown and the effect on consumption growth in emerging markets, so they were “considering major cuts to prevent any possible demand reaction”.
After reducing production in April 2020 when oil demand collapsed during the pandemic, the group has spent most of the past two years regularly adding barrels back to the market.
Biden made a controversial visit to Saudi Arabia in July, where oil production was discussed, among other things, with Crown Prince Mohammed bin Salman, the day-to-day ruler of the kingdom.
Biden had previously criticized Prince Mohammed for his alleged links to the murder of journalist Jamal Khashoggi.
But after accelerating production increases this summer under US pressure, Saudi Arabia last month signaled a change in course, prompting the Opec+ group to make a small cut of around 100,000 b/d to oil production targets as oil prices fell.
The possibility of deeper cuts has already drawn criticism from senior Democrats in the US. Ro Khanna, chairman of the House Subcommittee on the Environment, wrote on Twitter that the US should “make it clear to the Saudis that we will cut off the supply of aircraft parts . . . if they cut oil production to strengthen Putin and thereby fleece Americans”.
Saudi Arabia’s oil alliance with Russia, which brought Moscow into the expanded Opec group in 2016, has at times been at odds with its long-term ties to the United States, but Riyadh has been keen to gain a more independent role.
Saudi Arabia and Russia are the world’s second and third largest oil producers after the United States, but are much more dependent on energy revenues for public spending than the world’s largest economy.
The US is keen to target Russia’s oil revenues as a way to starve Moscow of financing its Ukraine invasion, but is also concerned about how high oil prices could rise if too much supply is lost from the market.
Washington has pushed the G7 to implement a so-called price cap on Russian oil sales as a means of keeping the Kremlin’s grip on the market while reducing the revenue it receives.
In December, EU sanctions will become stronger, including insurance bans on any ship carrying Russian oil, which the US and UK are also expected to adopt if a price cap can be agreed.
But Kevin Book, managing director of ClearView Energy Partners in Washington, said moves by Saudi Arabia and other producers to curb supply could be a reaction to the administration’s talk of a price cap.
“This is the part where diplomats talking about regulatory price caps meet producers talking about physical supply cuts,” Book said.
Saudi Arabia’s Energy Minister Prince Abdulaziz bin Salman, the half-brother of Prince Mohammed, has often warned that the group has limited spare production capacity left to fill any shortfalls.
He has also indicated that he believes oil traders underestimate the risk to the market and has highlighted increased “volatility” and gaps between financial and physical oil markets.
Additional reporting by Tom Wilson in London