Energy analysts believe that the deep production cuts may yet backfire for the OPEC king and US ally Saudi Arabia.
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The White House angrily pushed back at OPEC+ after the oil producer group announced its biggest supply cut since 2020, lashing out at what President Joe Biden̵[ads1]7;s administration described as a “short-sighted” decision.
Energy analysts believe the deep production cuts could yet backfire on OPEC kingpin and US ally Saudi Arabia, especially as Biden hinted that Congress would soon seek to limit the Middle East-dominated group’s influence over energy prices.
OPEC and non-OPEC allies, a group often referred to as OPEC+, agreed on Wednesday to cut oil production by 2 million barrels per day from November. The move is designed to spur a recovery in oil prices, which had fallen to about $80 a barrel from more than $120 in early June.
International benchmark Brent crude futures traded at $93.55 a barrel in Thursday morning deals in London, up around 0.2%. US West Texas Intermediate futures, meanwhile, were at $87.81, almost 0.1% higher.
The United States had repeatedly urged the energy alliance, which includes Russia, to pump more to help the global economy and lower fuel prices ahead of midterm elections next month.
In a statement, the White House said Biden was “disappointed by the short-term decision by OPEC+ to cut production quotas as the global economy deals with the continuing negative impact of Putin’s invasion of Ukraine.”
It added that Biden had asked the Energy Department to release an additional 10 million barrels from the Strategic Petroleum Reserve next month.
“In light of today’s action, the Biden administration will also consult with Congress on additional tools and authorities to reduce OPEC’s control over energy prices,” the White House said.
Strategists led by Helima Croft at RBC Capital Markets said that while the US signaled further strategic petroleum reserve releases were on the way, it was unlikely to see another blockbuster release in the near term.
“A more clear risk, in our view, is the imposition of US product export restrictions in a rising gasoline price environment,” said analysts at RBC Capital Markets.
“Congressional action on the NOPEC legislation also appears a credible outcome in light of the NSC statement to work with Congress to reduce OPEC’s overall influence on the oil market. White House opposition to NOPEC has served as a restraining influence on congressional leaders, ” they continued. .
“Today’s dog whistle could be interpreted as a sign that the president will not necessarily stand in the way of a floor vote on the bill that would declare OPEC a cartel and subject its members to Sherman antitrust laws.”
What is NOPEC?
The No Oil Producing and Exporting Cartels, or NOPEC, bill is designed to protect American consumers and businesses from artificial oil peaks.
The US legislation, which passed a Senate committee in early May but has yet to be signed into law, could expose OPEC countries and partners to lawsuits for orchestrating supply cuts that drive up global crude prices.
To enter into force, the bill must be passed by the full Senate and House, before being signed by the president.
Top OPEC ministers have previously criticized the NOPEC bill, warning that US legislation would lead to greater chaos in energy markets.
At a press conference in Vienna, Austria, on Wednesday, Saudi Arabia’s energy minister, Prince Abdulaziz bin Salman, said, “We will continuously prove that OPEC+ is here not only to stay, but here to stay as a moderating force to bring about stability. “
OPEC Secretary-General Haitham Al Ghais also defended the group’s decision to impose deep production cuts, saying the alliance sought to provide “security [and] stability of the energy markets.”
Asked by CNBC’s Hadley Gamble if OPEC+ made it come at a price, Al Ghais replied: “Everything has a price. Energy security also has a price.”
Just three months ago, Biden arrived in Saudi Arabia on a mission to urge one of the world’s largest oil exporters to increase oil production in an effort to bring down gasoline prices. The trip was part of an effort to improve diplomatic ties with Riyadh, which collapsed after the murder of journalist Jamal Khashoggi in 2018.
Weeks later, however, OPEC+ increased oil production by a minimal 100,000 barrels per day in what was interpreted as an insult to Biden.
On Wednesday about the group using energy as a weapon after the decision to impose deep production cuts, Saudi Arabia’s Abdulaziz bin Salman said: “Show me where the act of war is – period.”
OPEC+ decision “cannot stand”
Energy analysts said the actual impact of the group’s November supply cuts is likely to be limited, with unilateral reductions from Saudi Arabia, the United Arab Emirates, Iraq and Kuwait likely to do the main job.
Additionally, analysts said it is currently difficult for OPEC+ to form a view more than a month or two into the future as the energy market faces the uncertainty of more European sanctions against non-OPEC producer Russia amid the Kremlin’s crackdown in Ukraine — including on freight insurance, price caps and reduced petroleum imports.
“The Saudis say this was a market-driven decision, that they expect demand to fall over the winter – I don’t see how a cut in this volume is anything less than a political statement,” Michael Stephens, a fellow at Royal United Services Institute think tank in London, told CNBC.
“And even if it was based on technical reasons and pure supply and demand, that’s not how it’s being interpreted by the United States. And that’s the perception 90% of the law. And the perception is that the Saudis are not holding up trade,” he continued.
“The era we are in clearly shows that even if the Saudis coordinate oil prices with Russia, it will be seen as open support for Russia.”
Oil prices have fallen to about $80 from over $120 in early June, amid growing fears about the prospect of a global economic recession.
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Herman Wang, managing editor of OPEC and Middle East news at S&P Global Platts, told CNBC that OPEC+ imposed the deep production cuts with a longer-term view of taking them through a potential global economic recession.
“But it comes at a politically difficult time for the United States, which is heading into midterm elections, and the last thing the White House wants to see is gasoline prices rising,” Wang said.
“It adds a geopolitical element to what OPEC+ is doing, and while the group likes to say they keep politics out of their decisions, there is no doubt that there are potential ramifications to this beyond oil prices,” he added.
At a press conference during a visit to Chile, US Secretary of State Antony Blinken said on Wednesday that Washington has made its views clear to OPEC members.
Asked if he was specifically disappointed with U.S. ally Saudi Arabia, Blinken replied, “We have a number of interests with respect to Saudi Arabia, and I think the president laid those out during the trip.”
These include improving relations between Arab countries and Israel, Yemen and working closely with Riyadh to try to continue the ceasefire, Blinken said.
“But we are working every single day to ensure to the best of our ability that the energy supply from anywhere actually meets the demand, to ensure that energy is in the market and that prices are kept low.”
Sen. Bernie Sanders, I-Vt., said via Twitter: “OPEC’s decision to cut production is a blatant attempt to raise gas prices at the pump that can’t stand it.”
“We must end OPEC’s illegal price-fixing cartel, eliminate military aid to Saudi Arabia and aggressively transition to renewable energy,” he added.