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 1 million barrels a day at the meeting on Wednesday. This is by far the largest since early in the 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 energy costs down 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 mid-term elections next month.
Two people briefed on Saudi Arabia’s thinking say, however, that Saudi Arabia is keen to lower output both to prop up prices and so it can keep some production capacity in reserve. The kingdom fears 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 cut as it has seen its oil revenues decline in recent months, with buyers forcing large discounts on its oil sales following its full-scale invasion of Ukraine. The recent strength in the rouble also reduces the amount it receives in its domestic currency for oil deals sales primarily priced in dollars.
Opec+ announced this weekend that it would move the monthly meeting it has held since early in the pandemic from online to a full-blown 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 1 million b/d for the group as a whole, but Saudi Arabia may make a further unilateral production cut on top.
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 so were “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 last two years steadily adding barrels back to the market.
Mr Biden made a controversial visit to Saudi Arabia in July where oil production was discussed, among other issues, with crown prince Mohammed bin Salman, the day-to-day ruler of the kingdom.
Mr Biden had previously criticised MBS, as he is widely known, for his alleged links to the murder of journalist Jamal Khashoggi.
But after accelerating production increases over the summer, last month Saudi Arabia signalled a change of course, leading the Opec+ group in making a small cut of about 100,000 b/d to oil production targets as oil prices fell.
Brent crude, the international benchmark, has fallen from around $120 a barrel in early June to around $85 a barrel.
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 keen to target Russia’s oil revenues as a way of starving Moscow of funding for its 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 they receive.
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.
Saudi Arabia’s energy minister Prince Abdulaziz bin Salman, the first royal to hold the role and the half brother of Mohammed bin Salman, has frequently warned that the group has limited spare production capacity left to backfill any shortfall.
He has also indicated he believes oil traders are underestimating the risks to the market and has flagged heightened “volatility” and gaps between financial and physical oil markets.
– Copyright The Financial Times Limited 2022