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Opec-Plus Agrees Giant Cut, Shrugs Off US Pleas

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Opec-plus has agreed to cut its targeted oil production by 2 million barrels per day from November — a move criticized by a US administration keenly focused on energy prices ahead of midterm elections.

The producer group cited an uncertain outlook for the global economy and the oil market, but US officials immediately described the policy as "shortsighted."

The Biden administration had previously been pressing the alliance to increase its output to help drive down oil prices, but without success.

Brent crude oil futures closed $1.57 higher at $93.37 per barrel on Wednesday. They had already risen from recent lows in the $80s in anticipation of a substantial cut.

Opec-plus said the reduction in targeted output will remain in place until the end of next year, although adjustments might be made along the way in response to changes in market conditions.

A communique released after Opec-plus ministers' first in-person meeting since early 2020 described their decision as a "proactive" step intended to provide "long-term guidance" to the oil market.

Uncertainty about the impact of Western sanctions on Russian oil supply was also a key factor in the decision.

Energy Intelligence understands that the alliance went ahead and cut its output despite last-minute lobbying efforts by the US to persuade Mideast Gulf producers not to do so.

Although Opec-plus is cutting its targeted production by 2 million b/d, Energy Intelligence estimates that it will only lower "real-world" output by around 1 million b/d.

That's because the cut was made from official quotas in August, and some members — including Russia and Nigeria — have struggled with persistent shortfalls in their production.

Opec-plus as a whole is estimated to have produced around 3.6 million b/d below its official group target in August.

Backlash From Biden

The White House said President Joe Biden was "disappointed by the shortsighted decision by Opec-plus to cut production quotas while the global economy is dealing with the continued negative impact of [Russian President Vladimir] Putin's invasion of Ukraine."

The US, European nations and other countries around the world are concerned that high energy prices — driven in part by the war in Ukraine — are fueling record levels of inflation.

High commodity prices and the response by central banks to raise interest rates are stoking fears of a global recession.

The US and its allies are also concerned that high oil prices will support Russia — one of the top Opec-plus producers — as it wages war in Ukraine.

Opec-plus producers are keen to maintain cohesion and unity within the alliance, which is seen as essential if their efforts to manage oil market volatility are to be effective.

The reduction in Opec-plus output could hurt Biden and his Democratic party in midterm elections on Nov. 8. US Republicans have consistently sought to pin blame on the current administration for the recent high prices of crude oil and gasoline.

The nominal 2 million b/d cut in Opec-plus production is the biggest since the alliance slashed its output by 9.7 million b/d in response to a sharp drop in demand caused by the Covid-19 pandemic.

Eye on Demand

Saudi Arabia's Energy Minister Prince Abdulaziz bin Salman said that looking back over the past 35 years, he had not seen such a high level of uncertainty in the market as he did today.

Asked by a reporter after the meeting whether Opec-plus was using energy as a weapon by lowering its oil output, he responded: "Show me where is the act of belligerence."

"Opec-plus is here to stay as a moderating force," he added.

United Arab Emirates (UAE) Energy Minister Suhail al-Mazrouei told reporters that economic considerations had been the key driver behind the decision to lower production.

"A recession is one of the challenges we are looking at. We all know a recession affects supply and demand," he said.

Concerns about the troubled economic outlook and a slowing of global oil demand are also on the mind of analysts.

"There is no doubt demand has softened in recent months, especially following the end of the summer driving season, and continued but temporary lockdowns in China that are hurting mobility and growth," said Ole Hansen, head of commodity strategy at Saxo Bank.

Looking Ahead

The alliance's production cut should free up more spare capacity among some of its stronger producers such as Saudi Arabia, Kuwait and the UAE. This could then be used in the event of a future disruption of supply or a sudden surge in demand.

"The key question will be how will Opec-plus use their new augmented spare capacity come December if there are significant dislocations stemming from European sanctions," said Helima Croft, head of global commodity strategy at RBC Capital Markets.

Energy Intelligence estimates that the combined effect of the planned G7 price cap and the EU bans on imports of Russian crude oil and refined products, could result in the global market losing around 1.2 million b/d of supply.

Opec-plus members also agreed on Wednesday to extend their Declaration of Cooperation — the framework for their joint supply management efforts — by one year until the end of 2023.

The alliance's next ministerial meeting will be held on Dec. 4 and after that the frequency of its regular ministerial meetings will drop to every six months, rather than every month.

Opec-Plus Production Targets, November 2022-December 2023
 August 2022 Required ProductionVoluntary AdjustmentVoluntary Production
Opec Producers
Algeria 1,055-481,007
Angola1,525-701,455
Congo325-15310
Equatorial Guinea127-6121
Gabon186-9177
Iraq4,651-2204,431
Kuwait2,811-1352,676
Nigeria1,826-841,742
Saudi Arabia11,004-52610,478
UAE3,179-1603,019
Opec 1026,689-1,27325,416
Non-Opec Producers
Azerbaijan717-33684
Bahrain205-9196
Brunei102-597
Kazakhstan1,706-781,628
Malaysia594-27567
Mexico1,75301,753
Oman881-40841
Russia11,004-52610,478
Sudan75-372
South Sudan130-6124
Non-Opec17,167-72716,440
Opec-Plus43,856-2,00041,856

Topics:
Sanctions, Opec/Opec-Plus, Elections, Oil Supply, Oil Demand, Crude Oil, Oil Prices, Opec-Plus Supply , Macroeconomics , Opec/Opec-Plus
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