The Opec+ oil alliance plans to cut production substantially to support falling prices, according to people close to the discussions, as the group prepares for its first face-to-face meeting since March 2020.
The oil group, led by Saudi Arabia and Russia, is expected to discuss output cuts of more than 1 million barrels per day at a meeting on Wednesday. This is by far the largest since the beginning of the pandemic and corresponds to more than 1 percent of global shipments.
The move threatens to raise oil prices at a time when much of the world is struggling to lower energy costs and could cause a potential rift with the US, where President Joe Biden is seeking to lower fuel prices for motorists ahead of key midterm elections. Moon.
However, two people briefed on Saudi Arabia’s thinking say Saudi Arabia wants to cut output to support prices so it can keep some production capacity in reserve. The kingdom fears Russian output could plummet later this year as Western sanctions tighten on its oil exports.
Russia is also said to be in favor of a cut as it has seen oil revenues fall in recent months, with buyers forcing deep discounts on oil sales following its all-out invasion of Ukraine. The ruble’s recent strength also reduces the amount it receives in its home currency for oil deals that are primarily priced in dollars.
Opec+ announced this weekend that it will move the monthly meeting it has held since the start of the pandemic from online to a full-fledged meeting at the group’s headquarters in Vienna, adding to the sense that a major policy change needs to be discussed.
The cuts could reach 500,000 to 1 million b/d for the group as a whole, but Saudi Arabia may make further unilateral output cuts, people close to the talks said.
Energy Aspects’ Amrita Sen said the group was particularly concerned about the risk of a global slowdown and the impact on consumption growth in emerging markets, so it was “considering large cuts to avoid any potential demand response”.
After cutting output in April 2020 as oil demand collapsed during the pandemic, the group has spent much of the past two years steadily adding barrels back to the market.
Biden has previously criticized MBS, as he is widely known, for his alleged involvement in the murder of journalist Jamal Khashoggi.
But after output growth picked up in the summer last month, Saudi Arabia signaled a change of course, leading the Opec+ group to create small incision around 100,000 b/d of 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 clashed with its long-standing ties to the US, but Riyadh has wanted 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 dependent on energy revenue for government spending than the world’s largest economy.
The US wants to target Russia’s oil revenues as a way to starve Moscow of financing the Ukrainian invasion, but is also concerned about how high oil prices can rise if there is too much supply. lost from the market.
Washington has been pushing the G7 to impose a so-called price cap on the sale of Russian oil as a means of keeping the Kremlin’s barrels on the market while reducing the revenue they receive.
EU sanctions are due to tighten in December, including a ban on insurance for any ship carrying Russian oil, which the US and UK are also expected to enact if a price cap can be agreed.
Saudi Energy Minister Prince Abdulaziz bin Salman, the first royal to hold the role and a half-brother of MBS, has often warned that the group has limited spare production capacity to plug any shortfall.
He also signaled that he believed oil traders were underestimating the risks to the market and rose “volatility” and gaps between financial and physical oil markets.
Additional reporting by Derek Brower in New York and Tom Wilson in London