OPEC+ agrees on oil output cut

Sun sets behind an idle pump jack near Karnes City, US

The OPEC+ meeting at Vienna on Monday came amidst two events affecting the oil market — the G7 finance ministers decision to endorse the US proposal regarding price cap on Russia’s oil exports with effect from December 5 and secondly, Gazprom’s announcement on cutting off all gas supplies to Europe indefinitely. 

Although notionally these are unrelated events, the fact remains that the energy scene is increasingly fraught with uncertainties and there are many variables at work such as fears of a global recession, the continuing difficulty to conclude a US-Iran deal on JCPOA that would have lifted the sanctions against Iran’s oil exports. 

The statement by the OPEC secretariat on Monday’s meeting in Vienna has sent out a powerful message that not only is there going to be any increased oil production but a token cut of 100,000 bpd has been agreed upon in September to bolster prices that have slid on recession fears. Oil prices jumped after the announcement. US crude rose 3.3%, to $89.79 per barrel, while international benchmark Brent was up 3.7%, to $96.50, after the decision.

This is in the face of attempts by the Biden Administration to push through a decision on an additional increase in production so that oil prices would go down. Saudi Arabia and the UAE did not agree to the US suggestion, saying that it was outside the scope of the OPEC + agreement. 

The cut in oil production by 100,000 bpd is largely symbolic because OPEC+ members are estimated to be some 2.9 million bpd behind the collective quotas allotted to them. But the point is, this is the first OPEC+ oil supply cut in more than a year and it shows that the OPEC+ will not hesitate to take preemptive action. 

Russian Deputy Prime Minister Alexander Novak said on Monday that expectations of weaker global economic growth were behind the decision by Moscow and its OPEC allies to cut oil output. Novak said the global energy market is characterised by heightened uncertainty at the moment. “We are not talking about price formation, but about the adequacy of supply on the market, so that on the one hand there is no excess, and on the other there is no shortage.” 

The Saudi Energy Minister Prince Abdulaziz bin Salman has been more forthright, saying, “This (OPEC+) decision is an expression of will that we will use all of the tools in our kit. The simple tweak shows that we will be attentive, preemptive and pro-active in terms of supporting the stability and the efficient functioning of the market to the benefit of market participants and the industry.”

The Saudi Minister was implying that the OPEC+ also faces a market where concerns about the strength of demand have started to outweigh supply fears. In fact, crude futures have lost about 20% in the past three months on the threat of a global economic slowdown. 

Besides, OPEC+ weighs in on the likelihood that the negotiations to revive a nuclear accord and remove US sanctions on Iran’s petroleum sales might result in a successful agreement in which case, more than 1 million barrels a day will enter world markets shortly, according to the International Energy Agency. 

However, the latest indications are that the Biden Administration may find it politically expedient to postpone the future of the JCPOA (2015 Iran nuclear deal) to the post-midterm election period in the US beyond November 7. Of course, both the US and Iran (as well as the European Union) are interested in reaching an agreement and want to restore the JCPOA on favourable terms.     

At any rate, the OPEC+ move on Monday can only be seen as a rebuke from Saudi Arabia, the leading member of OPEC, to the Biden administration’s call for its Middle Eastern ally to increase production at a time of rising inflation and western sanctions on Russia’s energy industry. The OPEC+ decision comes less than two months after US President Joe Biden’s visit to Saudi Arabia when he said he expected the kingdom to take “further steps” to increase the supply of oil in the “coming weeks”.

After the OPEC+ decision, the White House said Biden is committed to shoring up energy supplies and lowering prices. “The president has been clear that energy supply should meet demand to support economic growth and lower prices for American consumers and consumers around the world,” White House press secretary Karine Jean-Pierre said in a statement.

But beyond asking Gulf states to boost production and unleashing crude from emergency stockpiles, western countries have no leverage in the matter, since industry investment and new drilling have lagged behind demand and a significant increase in output is not to be expected.

The OPEC+ has scheduled its next meeting for October 5 but signalled it may hold talks even before that “to address market developments, if necessary.” According to Reuters, Saudi Energy Minister Prince Abdulaziz bin Salman, half-brother of Crown Prince Mohammad Bin Salman, has been empowered to intervene whenever necessary to stabilise crude markets by calling for a meeting at any time. 

Quite obviously, things are moving in a direction where the G7 decision to impose a price cap on Russian oil is likely becoming the business of the OPEC+ as well, albeit indirectly. Russia has said it will stop supplying oil to countries that support the G7 idea. Signals from the physical market  suggest that supply remains tight and many OPEC states are producing below targets even as fresh Western sanctions are threatening Russian exports following up on the G7 idea. 

An unspoken factor is that the G7 move sets a precedent that is a cause of concern for all OPEC countries. Today, the G7 is cracking the whip on Russia over Ukraine, which has technically nothing to do with the oil market. Tomorrow, it could as well be on, for example, democracy deficit in the Gulf states. Simply put, the western powers are straying on to a turf that OPEC has jealously guarded as its preserve for the past 62 years since the cartel was established — and it is doing so by politicising the core issue of oil prices by introducing extraneous geopolitical considerations. 

At any rate, while speaking on the OPEC meeting’s outcome on Monday, Russian minister Novak said, “We shall examine how the market situation will evolve because there are many uncertainties” not least regarding “the declaration by G7 leaders regarding capping of the price of Russian oil” which will sow “uncertainty” on the global market. (Interestingly, Chinese Foreign Ministry has called on the G7 to reconsider its move: “Oil is a global commodity. Ensuring global energy supply security is vitally important. We hope relevant countries will make constructive efforts to help ease the situation through dialogue and consultation, instead of doing the opposite.”) 

The bottom line is that the US entreaties to disband the OPEC+ are getting nowhere. The OPEC meeting in Vienna on Monday underscored in its final statement that “OPEC+ has the commitment, the flexibility, and the means within the existing mechanisms of the Declaration of Cooperation to deal with these challenges (higher volatility and increased uncertainties) and provide guidance to the market.” 

The message is loud and clear: Saudi Arabia and Russia who form the axis of the OPEC+ are closely coordinating on shaping the world oil market even as they could be competing for market share.