As if it wasn’t restless enough on the energy front. On Wednesday, OPEC+ oil cartel announced a significant reduction from its joint production quota. From next month, that will decrease by 2 million barrels per day – the largest reduction since the corona crisis. Gas was already very expensive due to the Russian war in Ukraine, because the Kremlin cut off the supply. Now the oil supply is also being scaled back. Partly at the insistence of Russia, which would have had an important hand in the move.
Rumors about the production cut have already caused nervousness in the international energy markets in recent days. Several major oil prices (Brent, WTI) rose nearly 10 percent – a break with more than four months of price declines before that. When the oil ministers of OPEC+ decided on their measure on Wednesday, prices rose a little further – although there was no real shock. Due to overdue investments and lack of maintenance, many OPEC countries have been producing below their current quotas in recent times. This means that they can already remain below the new quota without reducing their production much. As a result, the ‘supply shock’ slightly smaller than it initially appears.
However, there was criticism. From, among others, the United States, itself one of the largest oil producers in the world, but not a member of the cartel. President Biden can use high gas prices badly in the run-up to the midtermelections next month. Washington had therefore previously put pressure on the alliance not to take too radical decisions. After announcing Wednesday, Biden called the decision “short-sighted.” There was also criticism from Europe. Because the continent is already struggling enough with the screeching inflation, which is fueled by extreme energy prices.
Russian signature
Within the cartel, Saudi Arabia, with a production of 12 million barrels per day, is by far the most dominant member, largely sets the course. But it was Russia, also one of the largest oil producers in the world and also a major voice within OPEC+, which is said to have pushed for the reduction above all. There is a lot at stake for Russia. In two months, the EU will introduce an import ban on Russian oil. That oil will probably be bought by Asian countries, such as China and India. But then probably at hefty discounts. Then it is useful if the market price is already a bit higher.
Just Wednesday, the G7 and EU decided on a new oil sanction against Russia
Just Wednesday, the G7, together with the EU, also decided on another oil sanction that will hurt Russia. In December, there will be a limit on the price at which Russian oil can be shipped via EU countries (such as Malta, Cyprus and Greece) to non-EU countries.
In addition, Russia earns less and less from its gas trade. Although Russian President Putin’s ‘gas weapon’ has pushed up prices to an extreme, Russia now hardly supplies Europe. Almost all pipelines are closed or broken. That gas can’t easily go elsewhere; the infrastructure is lacking. In the Financial Times A market analyst at a major western investment bank therefore concludes that Russia has apparently shifted its sights to disrupting the oil market, now that its gas weapon would wear out.
Saudi support
Saudi Arabia, along with Russia, will account for the bulk of the cut, both 526 million barrels per day less. The country’s support for the cut is not surprising. Riad reportedly fears a global recession, partly caused by interest rate hikes in the West, which in turn are intended to fight inflation, which will reduce demand for energy. It is a tried and tested recipe: before demand falls, supply decreases, so that prices remain attractive.
With the move, the Riad does risk a possible American counter-reaction. Last summer, Biden paid a visit to Saudi Arabia where he urged an increase in production. That visit was controversial, because as a presidential candidate he had said he wanted to make Saudi Arabia a “pariah state” over the murder of dissident journalist Jamal Khashoggi, presumably at the behest of Saudi Crown Prince Mohammed bin Salman (MBS). Biden swallowed the criticism because he needed Saudi Arabia to deal with high US gas prices and to isolate Russia after its invasion of Ukraine.
Since then, Riad has indeed gradually increased oil production, but is now adjusting its course again. A prominent Democratic delegate wrote on Twitter that the US must “make it clear to the Saudis that we will supply zero parts for their planes if they cut oil production to bolster Putin.” […]”