Oil producers group OPEC Plus is considering announcing big production cuts at Wednesday’s meeting, according to a person familiar with the thinking of Saudi Arabia, the group’s de facto leader.Analysts widely expected Such a move would be a blow to the Biden administration, which has been lobbying Saudi Arabia for more production.
The cuts would also mark a major turning point in OPEC+ policies, including Russia. Since the group cut oil production in early 2020 when demand collapsed due to the coronavirus pandemic, producers have announced a series of steady monthly gains, but have generally kept their targets low. Not achieved.
Analysts say Saudi Arabia appears determined to raise oil prices to about $90 a barrel. Friday’s international benchmark Brent crude oil price of about $85 a barrel was down about a quarter from its June high. Prices surged in early Sunday night trading after reports of a possible OPEC+ rate cut.
“It’s certainly possible that a group of producers will likely opt for deep cuts to show there are effective circuit breakers in the market,” said Helima Croft, head of commodities strategy at investment bank RBC Capital Markets. It is.” she said last week. Croft estimated that the group is considering announcing cuts of 500,000 to 1 million barrels per day. This corresponds to about 1% of the world supply.
A person familiar with Saudi Arabia’s thinking also said cuts to that scale were likely.
Saudi Arabia took a hawkish stance last month with a symbolic cut of 100,000 barrels per day. Now analysts say they may think it’s time to make a stronger statement.
Saudi Arabia’s drastic cuts would appear to be an act of defiance against the Biden administration, which pressured Saudi Arabia and other OPEC members to supply enough oil to keep prices down. President Biden visited the kingdom in July despite denying that Saudi dissident Jamal Khashoggi was killed by Saudi agents in 2018.
OPEC Plus appears to be trying to intervene in a market that is hard to read. Much of the recent price decline may be the result of concerns about factors such as interest rate hikes by central banks around the world rather than oil market fundamentals. Moreover, it is unclear how the global economy will perform in the coming months. Still, cuts in oil supply by OPEC+ could push oil prices higher and increase the likelihood of a global recession.
Prices may be under pressure, but oil inventories (the amount of tank farms) are low and the market could turn around soon.
A major unknown is the future output of Russia, the co-chair of OPEC Plus. Russian oil production is holding up better than many analysts expected under Western-imposed sanctions over the war in Ukraine. But Russian production could fall further if the European Union tightens sanctions against Russia later this year.
It may also be far from clear what OPEC+ means by the production cuts. This group has already fallen short of its target. For example, Russia fell one million barrels short of her daily quota of 11 million barrels in August, according to the Paris-based International Energy Agency.
The heavy cuts by Saudi Arabia, the largest producer in the group, would need to be detailed for the market to take it seriously.
Also, Russia’s position within the organization is unknown. Saudi Arabia appears to want to keep Russia, the world’s largest oil and gas producer, as a key member of the group, but sanctions could make it harder for Moscow to hit anything close to its current production targets. Moscow’s oil and gas industry is also almost certainly headed for medium-term decline as Western companies no longer supply technology. The Saudis appear to be betting that Russia will remain a major player in the energy market despite these negatives.
Saudi Arabia is also trying to ensure the continuation of OPEC Plus. The Petroleum Agreement on Production Control, which binds OPEC Plus, expires at the end of the year. Saudi Arabia wants to continue its market control regime, but an extension of the contract will probably require detailed discussion. The need to hold such talks soon may be the main reason the group decided to convene in Vienna on Wednesday.