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The OPEC+ alliance on Wednesday announced a cut of 2 million barrels a day in oil production – an amount that could send oil and gas prices back up after weeks of trending lower.
The meeting of the 24 OPEC+ oil-producing nations, including Russia, comes at a time when much of the world is already grappling with soaring energy costs. A supply cut will also heighten tensions between Saudi Arabia and the United States, where President Biden tried to rein in gas pump prices ahead of midterm elections.
The White House called the decision “short-sighted” and said in a statement that the administration would “deliver an additional 10 million barrels of the Strategic Petroleum Reserve to market next month, continuing the historic releases the President has announced.” ordained in March”.
OPEC+, formed in 2016, includes the 13 members of the Organization of the Petroleum Exporting Countries and 11 other non-OPEC members. In a statement, the group justified today’s decision by “uncertainty surrounding the outlook for the global economy and the oil market”.
It is unclear to what extent reducing supply would cause prices to increase. The world consumes up to 100 million barrels of oil per day, so taking 2 million off the market would have a noticeable effect.
The move is seen as an attempt by Saudi Arabia to prop up prices, which had hit as high as $120 a barrel in the spring but have started to falter on worries about a slowing global economy. They fell to less than $90 a barrel in September.
Observers say one sign of the alliance’s renewed focus is that this is its first in-person meeting since the pandemic began.
Yasser Elguindi, head of macro research at Energy Aspects, says the Saudis are trying to drive prices back to $100 a barrel or above by cutting production and tightening the market. He says the scale of the proposed cut took people by surprise.
“OPEC is trying to shock and impress with a significant number of production cuts that will get people’s attention,” he says. “And they’re trying to support prices to keep them from falling further.”
Elguindi says the production cut would be a sharp reversal of recent OPEC+ policy. The last time the group cut oil production was in May 2020, when demand plummeted at the start of the coronavirus pandemic.
Since then, its production has been slowly increasing. Then last month the group shifted gears and cut 100,000 barrels on the market. That’s a tenth of what analysts predict OPEC+ could announce on Wednesday.
The move could be seen as a rebuke to President Biden, who visited Saudi Arabia over the summer to ask for increased production. This was despite Biden’s comments in the past that he viewed the kingdom as a pariah state. He also publicly blamed Saudi Crown Prince Mohammed bin Salman for his involvement in the death of Saudi journalist Jamal Khashoggi at the Saudi consulate in Istanbul in 2018.
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“It seems clear that this is not the outcome Biden wanted when he traveled to Saudi Arabia in search of more oil,” said Jacques Rousseau, managing director of ClearView Energy Partners. “And so that could certainly be a problem in the future.”
Saudi Arabia has also expressed concern about an influx of oil from emergency stocks in Western countries. Rousseau says about 180 million barrels have been released globally since March, and 75% of that (about 134 million barrels) comes from the U.S. Strategic Petroleum Reserve.
“It was a very significant release of reserves,” he says, causing global supply to outpace demand. “So that’s one of the reasons why Saudi Arabia could get OPEC+ to take oil off the market, so that supply and demand can balance out more.”
A drastic cut in oil production could also help OPEC+ co-chair Russia. Its economy is based on energy revenues, now essential to its war effort in Ukraine. Despite the sanctions, Russia has not experienced a huge drop in production.
That could change by the end of the year, when the European Union is expected to toughen sanctions against Russia. Elguindi says it’s interesting that the Russians – so far – have never asked for a production cut.
“And about a week ago they actually came and asked OPEC to cut production by a million barrels a day,” he says. “I think it’s an acknowledgment that they’re going to lose volume going forward, and whatever they’re going to lose in volume, they have to make up for it in price.”
Rousseau says that even if OPEC+ announces a big cut, Russia’s production won’t actually drop – as the country is already producing well below its quota due to sanctions and failure to scale up investment in new oil infrastructure.
Saudi Arabia, he says, may have to manage the bulk of any potential production cuts.