Months of badgering by Western leaders counted for nought this week as OPEC+ announced a 2mn bpd quota reduction that serves to bolster prices and cover up issues raising production.
What: The reduction will lead to an effective output drop of around 1mn bpd.
Why: Price volatility, concerns about future upward production and dedication to the long-standing deal are all thought to have been factors in the decision.
What Next: The US has called out the move, threatening action to reduce OPEC’s influence on the market.
The OPEC+ group of oil producers made the decision to cut combined output by 2mn barrels per day (bpd) when they met in person this week for the first time since the coronavirus (COVID-19) pandemic began. It comes despite fears about the state of the global economy and follows a lengthy period during which Middle Eastern oil producers in particular have been urged to increase output as they near theoretical output highs.
The reduction was the group’s second in as many months, with September’s decision wiping out the 100,000 bpd added to output in August.
Over the previous 18 months OPEC+ had been working to return around 10mn bpd of supplies taken off the market to stem the massive losses experienced by oil exporting nations when crude prices plummeted in Q2 2020. The slow build-back ensured that prices rose steadily, but renewed volatility amid conflict and concerns about demand has necessitated action in the opposite direction as many market commentators opine that the group now views $90 per barrel as a non-negotiable price floor, though the Saudi government has vehemently denied any desire to control prices.
Criticism and collaboration
The cut drew immediate criticism from major consuming nations, led by the US, whose President Joe Biden lobbied hard earlier in the year to encourage OPEC+ members to raise output.
The White House published a statement by National Security Advisor Jake Sullivan and National Economic Council Director Brian Deese, which said Biden had been “disappointed by the short-sighted decision by OPEC+ to cut production quotas while the global economy is dealing with the continued negative impact of Putin’s invasion of Ukraine”. The true source of this disappointment is likely to be the upward pressure it will have on fuel prices just over a month before Biden faces a challenging midterm election.
However, despite widespread pressure, the group’s top producers – Saudi Arabia and Russia – have stuck by each other, appearing to have learnt from the folly of their short-lived price war that coincided with the start of the pandemic, and members said that the reductions were required “in light of the uncertainty that surrounds the global economic and oil market outlooks.”
With sanctions constraining the market for Russian crude as its ‘military operation’ in Ukraine continues and Moscow moves to annexe four south-eastern regions of its neighbour, Riyadh has refrained from criticism, perhaps with an eye on the stability of oil relations and another on its own long-running military campaign in Yemen.
Russia was reported to be keen to cut output by 1mn bpd, while Saudi Arabia had been rumoured to be considering an additional, unilateral cut in the region of 500,000 bpd.
The two countries account for more half of the OPEC+ group’s 43.86mn bpd production quota for October at 11mn bpd each, but while Saudi Arabia has been able to produce around this level of late, Russian output has fallen as sanctions bite.
With both countries’ quotas now falling to 10.478mn bpd, there will be less pressure on Saudi Arabia to maintain production at levels nearing all-time highs as prices sit in what Riyadh likely sees as a ‘middle ground’. Other producers that have been ‘maxing out’, most notably Kuwait, will also welcome the respite given issues in raising output.
While OPEC+ will reduce their collective quota by the headline 2mn bpd, underproduction among members will see output fall by around 1-1.1mn bpd, according to Saudi Arabian Energy Minister Prince Abdulaziz bin Salman Al-Saud.
The group fell around 3.6mn bpd short of its 43.856mn bpd quota with Iranian, Russian and Venezuelan sales remaining constrained by sanctions and Angola and Nigeria dealing with production issues.
The output reduction – and consumers’ displeasure – only serves to highlight the prescience of Saudi Aramco CEO Amin Nasser’s recent repetition of criticism that the challenges in supplying the market are largely borne of long-term upstream underinvestment.
Nasser has long been critical of the lack of balance with which developed nations have approached the energy transition while doing little to reduce reliance on imports, all while criticising the regimes of exporting nations. Amid the shortfall on physical markets as sanctions and supply chain issues persist, the tail is firmly wagging the dog.
In their joint statement, Sullivan and Deese reiterated the US Department of Energy’s intent to “deliver another 10mn barrels from the Strategic Petroleum Reserve to the market next month, continuing the historic releases the President ordered in March.” This has delivered around 850,000 bpd since June.
They added: “The President will continue to direct SPR releases as appropriate to protect American consumers and promote energy security, and he is directing the Secretary of Energy to explore any additional responsible actions to continue increasing domestic production in the immediate term.”
However, the SPR has reached its lowest level since the mid-1980s and will continue to fall until the end of the year, and may drop below 400mn barrels with more than half of this already accounted for under Congress-mandated sales. This significantly limits the options available to the US in terms of further SPR releases.
It was perhaps with this in mind that the White House statement added: “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,” perhaps alluding to efforts to push forward the NOPEC bill which is aimed at targeting the group’s ability to steer the market.
Such a move would need to pass through Congress and should it be implemented, it would surely be the final nail in the coffin in relations between Biden and Washington’s key Middle Eastern allies Saudi Arabia and the UAE.