Friday, December 9, 2022
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OPEC Plus considers important production cut to support oil prices

OPEC Plus, the group of oil producers, is considering announcing a major production cut when it meets on Wednesday, according to a person familiar with the thinking of Saudi Arabia, the group’s de facto leader. Such a move, which analysts say is widely expected, would be a blow to the Biden administration, after it pressured the Saudis to increase production.

A cut would also mark a major change in policy for OPEC Plus, which includes Russia. Since the group cut oil production in early 2020 when demand collapsed due to the coronavirus pandemic, producers have announced a series of steady monthly increases, though they have generally fallen short of those targets.

Analysts say the Saudis seem determined to raise oil prices to around $90 a barrel. Oil prices, around $85 a barrel on Friday for Brent crude, the international benchmark, have fallen by about a quarter from their June high. After reports of the possible OPEC Plus cut, prices rose in early trading on Sunday night.

“We certainly see a significant chance that the producer group will go for a substantial cut to try to signal that there is an effective circuit breaker in the market,” said Helima Croft, head of commodity strategy at RBC Capital Markets, a bank. investment. she told her last week. Ms. Croft estimated that the group was considering announcing a cut from 500,000 to one million barrels per day, about 1 per cent of global supply.

The person familiar with the Saudi thinking also said a reduction of that size seemed likely. In his opinion, she said, the oil market is oversupplied and demand is weakening due to a flagging global economy.

The Saudis signaled an aggressive stance last month with a largely symbolic cut of 100,000 barrels a day. Now, analysts say, they may think it’s time to make a stronger statement.

A sizable cut by Saudi Arabia would appear to be an act of defiance of the Biden administration, which has pressured the Saudis and other OPEC members to supply enough oil to keep prices in check. President Biden visited the Kingdom in July despite disapproval of him over the 2018 assassination of Saudi dissident Jamal Khashoggi by Saudi agents.

OPEC Plus appears to be trying to intervene in a market that is difficult to read. Much of the recent price decline may be the result of concerns about factors such as interest rate hikes by central banks around the world rather than oil market fundamentals. In addition, the behavior of the world economy in the coming months is far from clear. Still, a cut in oil supplies by OPEC Plus that drives up oil prices could increase the likelihood of a global recession.

While prices may be under pressure, oil inventories (tank farm volumes) are at low levels, meaning the market could rebound quickly.

A great unknown is the future production of Russia, co-chair of OPEC Plus. Russian oil production has held up better than many analysts expected due to sanctions imposed by the West over the war in Ukraine. But Russian production may fall further when the European Union tightens sanctions against Russia later this year.

What OPEC Plus means by a cut may also be far from clear. The group has already been missing their targets by a proverbial mile. In August, for example, Russia fell one million barrels short of its daily quota of 11 million barrels, according to the International Energy Agency, a Paris-based group.

To be taken seriously by markets, a cut would likely have to spell out a substantial reduction by Saudi Arabia, the group’s largest producer.

Russia’s status in the organization is also uncertain. The Saudis appear to want to keep Russia, one of the world’s biggest oil and natural gas producers, as a key member of the group, even though the sanctions are likely to make it harder for Moscow to meet current production targets. Moscow’s oil and gas industry also appears headed for almost certain decline in the medium term because Western companies will no longer supply it with technology. The Saudis appear to be betting that despite these downsides, Russia will remain a key player in energy markets.

The Saudis are also trying to make sure that OPEC Plus continues. The oil agreement on production management that unites OPEC Plus expires at the end of the year. The Saudis want the market management deals to continue, but a detailed discussion on extending the deal will likely be required. The need to hold such talks soon may be a key reason the group decided to meet in Vienna on Wednesday, their first in-person meeting since the start of the pandemic.

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