Q&A: Opec Secretary-General Explains Supply Cut

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In an exclusive interview with Energy Intelligence on Friday, Opec's Secretary-General Haitham al-Ghais explained the reasons behind the decision to cut 2 million barrels per day starting in November till the end of December 2023. The producer group insists that uncertainty over demand and the health of the global economy were the reasons behind the cut, not politics. However, the decision has been met with criticism from the US. Below is a transcript of the discussion that has been lightly edited for clarity and length.

Q: Why did Opec-Plus decide to cut 2 million b/d starting in November?

A: This is absolutely a very valid question and I think we owe it to everyone to explain the rationale behind this decision. I think you saw the press conference, where the ministers tried to explain the issues surrounding the environment we live in today, the great uncertainty we are going through, the high volatility we've been speaking about for months.

We see several macroeconomic headwinds, [for the] global economy — potentially now the likelihood of recession. This is not something that just all passes. And this is something that is shared and it's almost a consensus between major global economic banks, financial institutions, the World Bank, the IMF, the World Economic Forum. They have all published and written about macroeconomic headwinds related to high inflation and so forth. The word recession is being thrown around much more today than ever before. I think it was very well explained at the press conference and I'd like to reiterate that we at Opec and with our partners from Opec-plus, we learned from previous lessons. We take experiences, and we build on them. I think it was prudent to pre-empt and to be proactive and take the lead and give some clear guidance to the market about Opec-plus being there to preserve the stability of the market.

It's very clear if there is — and we obviously don't want this to happen — but if there is a recession and some people are already saying we are in a recession, but if the effects of that recession are felt significantly, the first thing that will be affected as always is global oil demand. And hence the decision to be proactive and adjust production by 2 million b/d.

Q: Can you explain why the cut was set at 2 million b/d? Why not a different level?

A: Well first of all, we said 2 million b/d. That's the agreement. That's what it stipulates. But as you know, some countries are already having issues with meeting their current production targets, so the net effective cut is let's say closer to 1 million b/d. We do a lot of analysis within the secretariat within the Joint Technical Committee leading up to the Joint Ministerial Monitoring Committee [JMMC] … and this is what drove this decision. I want to be very clear. It is data crunching, analysis, forecasts and scenarios that we analyze very carefully. And this then leads to a number where we see that there is a serious potential for an overhang, a surplus in the market and Q4 of this year … and leading into early next year.

Q: Will the Opec Secretariat review demand?

A: We've been quite bullish at Opec with our demand figures in the past, maybe more bullish than anybody else out there in the industry. I personally have been saying that we are still bullish on demand on several occasions.

But I think with the growing tone of potential recession, slowing down of the global economy, issues surrounding Covid policy in China and issues surrounding — inflation tightening monetary and fiscal policies globally. These are all very clear indicators of what is potentially out in terms of the economy. I don't want to jump the gun as they say in simple terms, but our monthly report next month is going to be issued next week and I think we will be showing a reduction in our demand growth forecast for 2022 and 2023. This is in line with the views ... [of] a potential global slowdown in the economy.

Q: You mentioned the possibility of an overhang. Is the overhang in the range of 1 million b/d, given that the actual cut is around 1 million b/d?

A: We have several scenarios. It depends which scenario you look at. We have a base-case scenario, high-case and low-case scenario. But this is the internal mechanics of how we do analysis. With that in mind, our modelers have developed a scenario where we see an overhang of up to 2 million b/d.

Q: Were there any political factors that drove Opec to make this decision?

A: I want to be absolutely crystal clear. There is no political agenda behind this decision. We are Opec and the Opec-plus group is a group that discusses technical parameters, economic parameters, supply, demand, production figures, state of the global economy, all the things that are purely fundamentally related to the market. We intend to always try to keep doing what we've done for all these years, which is try to preserve a balanced and stable and good health of the oil market condition. This is our objective. There is no politics behind it.

Q: Will these cuts indeed stay in place until December 2023?

A: We are agile and we're flexible. The decision was taken by a unanimous decision by 23 countries. It wasn't just one country or two countries. The 23 countries believe that there's so much lack of clarity on what the outlook looks like. That's the reason why we have decided to frame this agreement in a way whereby the JMMC could call for an emergency meeting, if necessary, to come up with a recommendation so that the 23 countries can accordingly adjust.

So I can't pre-empt because to end of 2023 is still far off. But like we've done in the past, we agree and then we adjust accordingly, whether upward or downward. We have so much unclarity and lack of visibility on what the state of the global economy is going to be like, in the next couple of weeks or months. Our objective is to make sure that the global market remains in a healthy state, which will encourage investment. We are firm believers that the industry requires significant investments going up to the future.

Q: How much spare capacity does this cut free up that could potentially be used in the future?

A: Reducing production today, avails more spare capacity in case of any global emergency crisis situation. That's what we've always done in Opec. And now with Opec-plus, since 2016, we have tried to make sure that there's adequate capacity, but that requires two things. Again, investment, investment, investment, these are the key words or key word. I keep saying it. What we are doing here is to try and prevent an unstable market. We are trying to make sure that the market is stable in order to encourage investors, as we believe investments are essential. So back to your question about spare capacity. Yes, we've been saying for a while there is a limited amount of spare capacity. I think this decision definitely will put us in a much better situation. I don't have the right to speculate on individual member countries or their spare capacity. But definitely a production adjustment of this magnitude will help to alleviate the tight spare capacity so that it may be available in case God forbid there's any global oil emergency situation.

Q: Do you see cohesion within the group? What is the mood inside Opec-plus?

A: You were at the press conference, and you saw. I don’t know if you recall but we haven't seen eight or nine ministers sitting at the press conference table — it's a sign. Back to the cohesion point, I think if we had a bigger table, we would have had a bigger show, honestly, and the presence of all the ministers. But the mood is good. There is unity, there's solidarity. There is a belief that we have to be proactive. And that's why, as you know, and I want to make it very clear, this is a 23-country decision. It's not a decision of one country or one producer.

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