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Opec-Plus Stuns Consumers With Massive Cut

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Citing massive market uncertainty and a need to be “proactive and pre-emptive,” Opec-plus has announced a 2 million barrel per day cut from August quota levels. The cut, the largest since the producer alliance’s historic 9.7 million b/d Covid-19 supply response in 2020, exceeded pre-meeting talk of a 1 million-1.5 million b/d cut. Brent's relatively muted price response to the decision — the benchmark gained about $2 to around $94 per barrel — indicates that producers’ demand fears have at least some validity, although oil prices have been rising since word of the big cut first surfaced last week. But the bold move could mark a watershed moment in producer-consumer relations, with the news triggering fury from the White House, which is desperate to keep inflation in check ahead of midterm elections in November and deny Russia a potential revenue tonic from high oil prices. Delegates in Vienna argued that rather than a bid to shore up prices, the decision was driven by a desire to reassert market control by freeing up spare capacity. Saudi Energy Minister Prince Abdulaziz bin Salman rejected any suggestion the move represented a weaponization of energy. “Show me where is the act of belligerence,” he said. He noted that prices of numerous commodities, including coal, aluminum and even baby formula, have seen far greater recent increases than those for crude. But many analysts foresee substantial declines in Opec-plus member Russia's production in the coming months amid tightening Western sanctions and a G7 price cap, which left Opec-plus facing accusations that it was throwing a lifeline to Moscow and endangering a global economy on the cusp of recession.

Although Opec-plus is cutting its headline production by 2 million b/d, Energy Intelligence estimates that it will only lower "real-world" output by around 1 million b/d, due to recent massive underproduction versus its targets. Nevertheless, it remains a controversial decision due to a combination of high energy prices, persistent inflation, repeated consumer appeals for more supply, and mounting recession fears. US President Joe Biden expressed “disappointment by the shortsighted decision” and a White House spokeswoman said it was "clear" that Opec-plus was "aligning with Russia." Producers, meanwhile, have grown frustrated by Western interventions in energy markets recently. Brussels and Washington rail against Moscow’s alleged weaponization of energy, since Russian gas flows to Europe have been slashed following Russia's invasion of Ukraine. In this context, Opec-plus’ decision will be seen by many in the OECD as the group taking Moscow's side by providing support to oil prices. But for producers, it is the West that is guilty of politicizing energy policy, through repeated and reflexive use of sanctions and other measures like the price cap. Resentment of OECD “arrogance” is not limited to producers, with many in the developing world railing against the West’s anti-Russia measures, which they see as primarily responsible for driving high prices. It is noteworthy that Wednesday’s decision appeared a smooth one, and that unlike during 2008’s oil price surge, developing nations have largely refrained from calling for more Opec oil.

But more such interventions may be forthcoming, meaning producer-consumer tensions may ratchet higher. Further releases from US strategic stocks are now possible, and White House National Security Adviser Jake Sullivan warned of potential “additional tools and authorities to reduce Opec’s control over energy prices.” These could include revival of so-called "Nopec" legislation, which could see Opec member nations face antitrust lawsuits in the US for holding back oil production to push up prices. The cut could also give fresh US momentum to striking a nuclear deal with Iran, which would unleash more barrels.

Opec-plus cited heightened macroeconomic concerns — in addition to seeking greater spare capacity flexibility — in making the cut. But it did not — for now — revise its demand forecast lower, citing extreme volatility. Thus, it officially retains a relatively bullish view, projecting demand to rise 2.75 million b/d this quarter and fall 600,000 b/d next quarter. By contrast, Energy Intelligence sees demand rising 1.7 million b/d this quarter and falling 2 million b/d next. Stifel analysts said the quantum of the Opec-plus cut "does broadly match" International Energy Agency expectations of the world being relatively oversupplied through the next nine months by just under 1 million b/d.

In many ways, this week's meeting marks a new start for Opec-plus. Its cooperation agreement has been extended to end-2023, and producers are returning to their traditional biannual ministerial meetings, rather than the monthly gatherings that defined the pandemic. Ministers will meet again on Dec. 4. To retain flexibility in the face of high volatility, Opec-plus’ Joint Ministerial Monitoring Committee will have the power to call for emergency ministerial meetings.

Topics:
Opec-Plus Supply , Opec/Opec-Plus, Oil Supply, Oil Demand, Sanctions, Ukraine Crisis
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