At a meeting in Vienna on Wednesday, OPEC+ agreed to the largest cuts in crude oil output since the 2020 COVID pandemic, limiting supply in an already tight market despite pressure from the US and others to pump more.
Crude oil prices have fallen to around $90 from $120 three months ago due to fears of a worldwide economic slowdown, higher US interest rates, and a stronger dollar. According to a person familiar with the subject, the US has pressured OPEC not to proceed with the cutbacks, arguing that the fundamentals do not support them.
“Higher crude oil prices, if driven by significant production cuts, would undoubtedly annoy the Biden Administration ahead of the midterm elections in the United States,” Citi analysts wrote in a note. “There could be significant political repercussions from the United States, including fresh releases of strategic stocks, as well as certain wildcards, such as further promotion of a NOPEC bill,” Citi said, referring to a U.S. antitrust law against OPEC.
JPMorgan also predicted that Washington will respond by releasing more crude oil reserves. According to OPEC+ sources, the agreed-upon production cutbacks of 2 million BPD, or 2% of world demand, will be implemented using existing baseline data. Because OPEC+ fell approximately 3.6 million barrels per day shy of its output target in August, the cuts would be less severe.
Under-production occurred as a result of Western sanctions imposed on countries such as Russia, Venezuela, and Iran, as well as output issues with producers such as Nigeria and Angola. According to Goldman Sachs analysts, the true production cuts would amount to 0.4-0.6 million BPD, primarily by Gulf OPEC members such as Saudi Arabia, Iraq, the United Arab Emirates, and Kuwait.
Oil production cut impact
Jefferies analysts assessed the true cuts at 0.9 million BPD. Saudi Arabia and other members of OPEC+, which includes the Organization of Petroleum Exporting Countries and additional producers such as Russia, have stated that they prefer to avoid volatility rather than target a specific crude oil price. After rising on Tuesday, benchmark Brent crude traded steady at $92 per barrel on Wednesday.
Russia has been accused by the West of weaponizing energy, causing a crisis in Europe that could result in gas and power rationing this winter. Meanwhile, Moscow accuses the West of weaponizing the dollar and banking institutions like SWIFT in revenge for Russia’s deployment of troops into Ukraine in February. While Saudi Arabia has not criticized Moscow’s activities in Ukraine, US officials have stated that one of the reasons Washington wants lower crude oil prices is to deny Moscow access to oil income.
Relations between Saudi Arabia and the Biden administration have been strained, with the latter visiting Riyadh this year but failing to gain solid cooperation promises on energy. “The decision is technical, not political,” Energy Minister Suhail al-Mazroui of the United Arab Emirates told reporters before the meeting.
“We will not utilize it as a political organization,” he added, adding that one of the primary subjects would be fears about a worldwide recession. Russian Deputy Prime Minister Alexander Novak, who was placed on the United States’s Specially Designated Nationals list last week, also traveled to Vienna to attend meetings. Novak is not subject to EU sanctions.
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