OPEC+ agrees to cut production by 100,000 barrels a day

Oil
By Editor_1
By Stanley Reed

VIENNA – Officials of OPEC and its major allies agreed Monday (5) to modestly cut oil production by 100,000 barrels a day, rolling back the increase they approved a month ago.

The trim is so small — about one-tenth of a perc ent of world output — that it will have little practical impact on supplies. But it appears intended to show that OPEC+ is determined to defend a price level of around $100 a barrel.

Futures for Brent crude, the international benchmark, were up by 3.5% on Monday to about $96.50 a barrel.

“This shows that OPEC countries have gotten used to $100 oil,” said Bill Farren-Price, head of macro oil and gas at Enverus, a market research firm. “Despite the recession risks that are mounting, they are not prepared to give that up without a fight,” he added.

That message was trumpeted in a news release issued after the meeting. OPEC+ has “the commitment, the flexibility and the means” to deal with what it said are “higher volatility and increased uncertainties” in the market, the statement said. The group said that the September increase had been intended for only one month.

By trimming production, even by a small amount, OPEC+ is also demonstrating that it is willing to shrug off the entreaties of the Biden administration, which has been lobbying Saudi Arabia, the United Arab Emirates and other oil producers to increase output to help bring down the price of gasoline, in part to avoid a backlash against the war in Ukraine for causing higher energy prices.

Despite President Joe Biden’s trip to the kingdom in July, the Saudis appear to have led the initiative for a production cut. Clearly, what is more important to OPEC+ at the moment is keeping revenues flowing. Crown Prince Mohammed bin Salman, at least for now, is unwilling to ramp up Saudi Arabia’s capacity to produce additional oil to help Biden.

The cut “sets up a confrontation in terms of expectations of Western developed economies versus the Gulf States,” said Richard Bronze, head of geopolitics at Energy Aspects, a market research firm.

The decision by OPEC+ on Monday comes just a few days after Russia, a co-leader of OPEC+, said that it was shutting off a key natural gas pipeline to Germany indefinitely, leading to a jump in natural gas futures prices in Europe on Monday. Russia has also said it is determined to resist efforts by the Group of 7 large industrial countries to impose a price cap on Russian oil.

OPEC officials, led by Saudi Arabia, have expressed alarm at the recent slide in oil prices from $116 a barrel for Brent crude in June. “They are determined to stop prices from falling too much,” said a note to clients from Energy Aspects.

Two big unknowns haunt the market. One is how long renewed COVID-19 lockdowns in China, the world’s largest oil importer, will continue to sap demand there. The second is whether a deal will be reached over Iran’s nuclear program that could eventually unleash substantial volumes of new Iranian oil on the market. Iran is both a member of OPEC+ and a rival of Saudi Arabia.

Saudi Arabia, which chairs OPEC+, has been reminding the markets recently that it is ready to intervene if it sees a danger of price declines running out of control. Saudi Arabia is also sending a signal to the Biden administration that the kingdom is prepared to take steps, like cutting production that might pre-empt the downward pressure on oil prices from a nuclear deal with Iran.

The quotas noted Monday are largely symbolic rather than representing any detailed plan, analysts say. Oil production quotas of many of the group’s members are higher than what many of these countries are actually pumping.

For example, while oil production in Russia has held up better under sanctions than many forecasters predicted, the country fell about 1 million barrels a day short of its target in July, according to estimates from the International Energy Agency.

In July, OPEC+ was nearly 3 million barrels a day short of its combined targets, according to the IEA. Such shortfalls are likely to continue in coming months as sanctions tighten on Russia, and as other countries, like Nigeria and Angola, are unable to meet their quotas because of a lack of investment and operational constraints.

-New York Times

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