How we think the OPEC+ meeting will unfold

Good morning and welcome to Energy Source, arriving today from London.

The main focus this week is on OPEC+ and whether the recent drop in oil prices – and growing anger among many members over the war between Israel and Gaza – will result in the group deepening production cuts when it meets on Sunday. I’ll be covering the meeting in Vienna, which is always a wild whirlwind of gossip, intrigue and overpriced sandwiches in those gilded hotel lobbies that ministers love to pass through.

Any readers who will be there, write to me.

While many oil traders have largely dismissed the threat of the war spreading in the region or having a significant impact on prices (Brent crude is lower than it was on October 7, when Hamas killed about 1,200 people in southern Israel), some analysts believe that the market has been too quick to dismiss all risks.

OPEC+ also faces a number of more mundane challenges. No less important is the increase in production among its own members, from increased Russian exports to the potential for a significant increase in volumes from Iraq.

There’s a lot to unpack, so without further ado, let’s get into the details.

Thank you for reading. – David

The OPEC+ dilemma in Saudi Arabia

The current expectation heading into Sunday’s meeting is that Saudi Arabia will, at a minimum, extend its voluntary production cut of 1 million barrels per day until at least the spring. This cut was first introduced in the summer as a one-month deal (or “lollipop” for the market, to use the unique expression of Saudi energy minister Prince Abdulaziz bin Salman).

This “lollipop” came on top of the group’s broader production cuts, meaning the kingdom’s output was reduced to 9 million barrels per day, significantly below its maximum capacity of about 12 million b/d.

The hope in OPEC+ was that the oil market would adjust in the second half of the year. But while crude oil briefly flirted with challenging the $100-a-barrel level in September, driven largely by the extension of the Saudis’ voluntary cut (and a little help from Russia), prices have returned. fall.

Last week, Brent hit a four-month low of $77 a barrel, which is not only below the level at the start of the Israel-Gaza war, but also below the level at which prices were trading in October 2022, when Saudi Arabia first led the lineup at the start. to reduce production, despite opposition from the White House.

That is why expectations of a greater cut have increased. The Financial Times reported on Friday that another further cut of 1 million b/d by the group was likely on the table, while Reuters had its own report saying a cut (of unspecified size) was now being considered. Prices have since recovered.

While a 1973-style oil embargo has been ruled out, people close to the Gulf ministers’ thinking said anger over the Israel-Gaza conflict was fueling a desire to send a signal: yes, the main goal is to support the oil price, but a decent-sized cut can also subtly express discontent with the US approach to the conflict.

The politics, as always with OPEC+, are complicated. Saudi Arabia has presented itself as a leader in the Arab and Muslim world, hosting an “extraordinary” summit in Gaza earlier this month at which it was alleged that Israel has committed war crimes. (Israel denies this).

Saudi Arabia’s Foreign Minister subsequently led a delegation to China to discuss Gaza, on what the country claims is a tour of permanent members of the UN Security Council (the United States, China, France, the United Kingdom and Russia). But it is notable that Beijing was the first port of call, when the United States is the kingdom’s oldest ally and generally the interlocutor on Middle Eastern affairs.

The kingdom may want to eventually revive a plan to normalize relations with Israel, which has been frozen during the conflict. In exchange, they would seek an enhanced security relationship with the United States. Some analysts believe the pause in diplomatic progress with Israel gives Saudi Arabia the space to dismiss any concerns in the White House about further cuts for now.

The Biden administration’s top energy adviser, Amos Hochstein, has said he is confident that OPEC+ will not “weaponize” oil supplies, although that does not rule out a cut, which the group could sell as motivated solely by the weakening of the market. The White House has absorbed a series of similar snubs over the past year, glad that oil prices have remained relatively manageable ahead of next year’s presidential election.

Meanwhile, OPEC member Iran has pushed for an oil embargo. While an embargo is likely to be ruled out, Tehran could try to rally its members to support more limited restrictions, along with members such as Algeria and Kuwait, which have expressed opposition to the war.

The idea is that Saudi Arabia might be willing to accept a cut, if it is publicly said to be driven by oil market fundamentals, and if it believes doing so will strengthen its position among Arab and Muslim countries.

However, the kingdom is likely to want some concessions. Iraq, for example, is surpassing its production target and could bring even more barrels to the market if a deal is soon reached to reopen its Kurdish export pipeline.

Iran’s own exports have also increased, which could revive calls for it to be given a production target, which has been suspended while it is under US sanctions. There is certainly some frustration among Gulf producers because the United States appears to have eased its enforcement of sanctions lately.

Russia is something of a wild card. He is unlikely to oppose further cuts and anything that upsets the White House would be welcomed in Moscow. But is he willing to significantly restrict his own production while desperate for funds for his war in Ukraine?

A week is a long time in the oil market. Expect some more drama before Sunday arrives.

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Energy Source is written and edited by Jamie Smyth, Myles McCormick, Amanda Chu, Tom Wilson and David Sheppard, with support from the Financial Times’ global team of reporters. Contact us at energy.source@ft.com and follow us on Twitter at @FTEnergy. Catch up on previous editions of the newsletter here.