Cutting OPEC+ oil production favors Russia
October 6, 2022
At its monthly meeting this week, the OPEC cartel and its allies, which include Russia, moved to cut their combined daily production of crude oil by 2 million barrels per day (bpd). That's about 2% of global oil output. OPEC+ produces around 40% of the globe's crude.
It's the largest reduction since a midpandemic cut in 2020, and comes just two months ahead of the European Union's planned embargo on Russian oil.
It's also an affront to US President Joe Biden, who this summer made a controversial visit to Saudi Arabia, OPEC's largest oil-exporting nation and the group's de facto leader.
Questionable market conditions
The cartel says it's concerned about the falling price of oil. After shooting to nearly $140 (€142) a barrel in March following Russia's invasion of Ukraine, the price of Brent crude on the spot market — that is, the daily price — fell to nearly $80 a barrel in September.
The purpose of OPEC is to ensure stability in oil prices and production, as well as maintain a steady income for oil-producing nations. That's no easy feat when the EU has sworn to stop buying oil from Russia, one of its key suppliers. OPEC+ says its decision was caused by uncertainty in global economic and oil market outlooks.
But, in a note to clients, the chief commodities economist at Capital Economics, Caroline Bain, said the market backdrop for the supply cut was rather unusual.
"Global oil stocks are historically low and, so far, high prices have failed to materially dent demand," she wrote.
The cheap price of crude is bound to have played a role in the decision.
Political games
As did politics. Energy markets have become highly politicized ever since Russia invaded Ukraine in February. US and EU sanctions on Russian energy have been one of the West's main strategies for eating away at Moscow's war chest. Russia is the world's third-largest oil producer, behind the United States and Saudi Arabia, and a top global exporter, according to the International Energy Agency (IEA).
Group of Seven (G7) nations and the European Union are planning to implement a price cap on Russian oil, a tactic designed to hit Russian energy revenues. But a cut in oil output globally, as OPEC+ has announced, will drive the price of oil up.
"By putting upward pressure on prices, that by itself is a move to support Russian oil production and the Russian economy just at a time when Western powers are considering a price cap on Russian oil exports," Carole Nakhle, CEO of Crystal Energy, told DW.
The price of the benchmark Brent North Sea crude climbed back above $90 a barrel following the OPEC+ announcement. Capital Economics' Bain said that at this point the institute expects the price of Brent crude to close out the year at $100 a barrel. Some analysts see it going higher.
Not what it seems
But experts also say the production cut is less drastic than it seems at first glance. Several oil producers, including Angola, Nigeria, and Russia, have not been reaching production quotas set out in current agreements. OPEC+ production in August fell short of agreed levels by about 3.4 million bpd, according to the IEA. Saudi Arabia's energy minister, Abdulaziz bin Salman, said the real supply cut would be closer to 1 million bpd.
"Saudi, the UAE (the United Arab Emirates) and Kuwait are likely to take up most of the burden of cuts," Tilak Doshi, managing director of Doshi Consulting, who was previously with oil company Saudi Aramco, told Reuters.
"It's a slap on the Biden administration's face by OPEC+," he said.
In response, the United States has announced that it will release a further 10 million barrels from its strategic reserve in November to combat high prices at the pump. The OPEC+ announcement comes at a critical time for President Biden, as his Democratic Party hopes to keep control of Congress following midterm elections in November. It also provides ammunition to those lobbying the United States to drill for more oil at home.
Winners and losers
Emerging markets will also struggle to react to the market shock. President Ranil Wickremesinghe said Sri Lanka, which is currently facing its worst economic crisis since it gained independence in 1948, would have to pay even more for oil as richer countries stock up their own reserves.
"This is not just an issue faced by us, but several other South Asian countries," he told Parliament on Thursday. "Global inflation is going to hit us all next year."
Saudi Arabia and the other Gulf states involved with OPEC+ have had a restrained response to Russian President Vladimir Putin's invasion of Ukraine. Cutting production now goes a step further, Andrew S. Weiss, Russia expert and vice president for studies at the Carnegie Endowment, wrote in an analysis of the move.
"On balance," he said, "[these countries] effectively sided with the Kremlin, which enabled the Putin regime to refill its coffers and to limit the impact of US and EU sanctions."
Edited by: Ashutosh Pandey