HomeBlogFinanceOpec+ plans substantial oil production cut to prop up prices

Opec+ plans substantial oil production cut to prop up prices

The Opec+ oil alliance is planning a substantial cut in production to prop up falling prices, according to people close to the discussions, as the group prepares to meet in person for the first time since March 2020.

The oil group, which is led by Saudi Arabia and Russia, is expected to discuss a production cut that could total more than 1mn barrels a day at the meeting on Wednesday. This is by far the largest since early in the coronavirus pandemic and equivalent to more than 1 per cent of global supplies.

The move threatens to boost oil prices at a time much of the world is fighting to bring down energy costs and could create a potential rupture with the US, where President Joe Biden has been trying to lower fuel prices for motorists ahead of crucial midterm elections next month.

Two people briefed on Saudi Arabia’s thinking said, however, that the kingdom was keen to lower output both to prop up prices and so it can keep some production capacity in reserve. Riyadh fears that Russian output could fall sharply later this year when western sanctions against its oil exports tighten.

Russia is also said to be in favour of a production cut as its oil revenues have declined in recent months, with buyers forcing large discounts on its supplies following Moscow’s full-scale invasion of Ukraine. The recent strength of the rouble has also reduced the amount it receives in its domestic currency for oil deals sales primarily priced in dollars.

International oil benchmark Brent rose 3 per cent after the news that the producer group was considering cutting supply, to $87.67 per barrel. The contract remains well below the high of more than $130/b struck earlier this year following the invasion of Ukraine.

Opec+ announced this weekend that it would move the monthly meeting it has held since early in the pandemic from online to an in-person gathering at the group’s headquarters in Vienna, adding to a sense that a substantial policy shift is to be discussed.

People close to the talks said the cuts could total 500,000 b/d to 1mn b/d for the group as a whole, but Saudi Arabia may make a further unilateral production cut in addition.

Amrita Sen at Energy Aspects said the group was particularly worried about the risk of a global slowdown and the effect on consumption growth in emerging markets and was “considering large cuts to pre-empt any possible demand reaction”.

After slashing production in April 2020 as oil demand collapsed during the pandemic, the group has spent most of the past two years steadily adding barrels back to the market.

Biden made a controversial visit to Saudi Arabia in July, and discussed oil production with Crown Prince Mohammed bin Salman, the day-to-day ruler of the kingdom.

Biden had previously criticised Prince Mohammed for his alleged links to the murder of journalist Jamal Khashoggi.

But after accelerating production increases this summer following US pressure, last month Saudi Arabia signalled a change in course, leading the Opec+ group in making a small cut of about 100,000 b/d to oil production targets as prices fell.

The possibility of deeper cuts has already drawn criticism from senior Democrats in the US. Ro Khanna, chair of the House of Representatives subcommittee on the environment, wrote on Twitter that the US should “make it clear to the Saudis that we will cut off their aviation parts supply . . . if they cut oil output to strengthen Putin and thereby fleece Americans”.

Saudi Arabia’s oil alliance with Russia, which brought Moscow into the expanded Opec group in 2016, has at times sat at odds with its long-term ties to the US, but Riyadh has been keen to carve out a more independent role.

Saudi Arabia and Russia are the world’s second- and third-largest oil producers, after the US, but are much more heavily reliant on energy revenues for government spending than the world’s largest economy.

The US is seeking to target Russia’s oil revenues as a way of starving Moscow of funding for the Ukraine invasion, but is also concerned about how high oil prices might surge if too much supply is lost from the market.

Washington has pushed the G7 to implement a so-called price cap on Russian oil sales as a means of keeping the Kremlin’s barrels in the market while reducing the revenues it receives.

In December, EU sanctions are set to strengthen, including insurance bans on any ship carrying Russian oil, which the US and UK are also expected to enact if a price cap can be agreed.

But Kevin Book, managing director of ClearView Energy Partners in Washington, said Saudi Arabia and other producers’ move to restrict supply may be a reaction to the Biden administration’s talk about a price cap.

“This is the part where diplomats talking about regulatory price caps run into producers talking about physical supply cuts,” Book said.

Saudi Arabia’s energy minister Prince Abdulaziz bin Salman, the half-brother of Prince Mohammed, has frequently warned that the group has limited spare production capacity left to backfill any shortfall.

He has also indicated that he believes oil traders are underestimating the risks to the market and has flagged heightened “volatility” and gaps between financial and physical oil markets.

Additional reporting by Tom Wilson in London

Video: How Putin held Europe hostage over energy | FT Energy Source

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