OPEC+ cuts oil production amid recession fears

Posted 05 September, 2022

The OPEC + countries decided on Monday to reduce their production to support prices in the face of fears of recession, a first for more than a year, and the drastic cuts made due to the Covid-19 pandemic.

The representatives of the thirteen members of the Organization of the Petroleum Exporting Countries (OPEC), led by Saudi Arabia, and their ten allies led by Russia, agreed to "return to the quotas of August", i.e. a down 100,000 barrels from September, the Vienna-based alliance said in a statement.

The group, which met by videoconference, leaves the door open to new discussions before the next meeting on October 5, “to respond if necessary to market developments”.

Over the course of its monthly meetings, OPEC+ is resisting calls from Westerners to open its floodgates more widely.

Rising in veiled words against the announced reduction, the United States reacted by calling on Monday for a balance between supply and demand for energy.

US President Joe Biden "has been clear that energy supply must match demand to support economic growth and lower prices for consumers in America and around the world," according to a House statement. White.

"This symbolic drop is not a real surprise after the murmurs of recent weeks," reacted in a note by Caroline Bain, an analyst at Capital Economics.

The Saudi Minister of Energy, Abdelaziz ben Salman, had seemed to open the door, ten days ago, to the hypothesis of a cut, denouncing a market "fallen into a vicious circle of low liquidity and volatility extreme".

Hit by a gloomy global economic outlook, prices of the two global crude benchmarks have slipped in recent weeks away from their March highs, near $140 a barrel.

Around 7:20 p.m. GMT, the price of a barrel of Brent from the North Sea fell by 0.53%, to 95.23 dollars, and the WTI, the benchmark for the North American market, gained 2.3%, to 88.87 dollars.

 

"Central Petroleum Bank"

 

"This decision shows that we are ready to use all the tools at our disposal", commented the Saudi minister, in an interview with the financial agency Bloomberg. "We will be attentive and dynamic to support market stability and efficiency."

The alliance "means that it will act to support prices if they were to collapse", for example in the event of a return of Iranian oil, explains Matthew Holland, a geopolitical analyst for the research institute Energy Aspects.

For US President Joe Biden, who visited Saudi Arabia for the first time as President of the United States in mid-July to try to influence Riyadh's strategy, it is "a blow", said Craig Erlam, an analyst at the OANDA trading platform.

For him, the "political damage" caused by this controversial visit is "pure waste" with a result "worse" than before this initiative.

"Saudi Arabia and OPEC+ are the +Central Oil Bank+", quips Bjarne Schieldrop, an analyst at the Swedish bank SEB. "And better never try to fight them."

Moscow, pillar of the group with Riyadh, for its part evoked "many uncertainties" linked in particular to "the declaration of the leaders of the G7 concerning the capping of the price of Russian oil", according to the words of the Deputy Prime Minister in charge of energy issues.

 

Question of "credibility"

 

Another element taken into account is the regular inability of OPEC+ to fill its quotas.

"Current production and quotas are now disconnected, so it's a matter of credibility," Schieldrop points out. It is estimated at nearly 3 million barrels per day below the stated objectives.

In the spring of 2020, the cartel had made sweeping cuts in the face of the collapse in demand caused by the pandemic. A year later, he started to reopen the floodgates, but with great difficulty.

Extended political crises, or lack of investment and maintenance during the pandemic now handicapping oil infrastructure: many countries in the group such as Angola or Nigeria cannot pump more.

Only Saudi Arabia and the United Arab Emirates seem to have spare production capacity.

But the analyst notes that Riyadh currently flows nearly 11 million barrels of oil per day, a level it had reached only twice in its history, and only temporarily.

"The current level is way above his comfort level," Schieldrop points out.

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