Deep oil production cuts approved by Opec+ sent shockwaves across energy markets, put the cartel on a collision course with Washington and pointed to a strengthening bond between Saudi Arabia and Russia.
The Opec cartel and allied producers agreed on Wednesday to collectively reduce output by 2mn barrels a day. The move threatens further inflationary pressures in a world economy already burdened by an energy crisis.
The implications are far-reaching, from the future price of oil to the future relationship between the US and Saudi Arabia.
What Opec+ agreed — and why
The group led by Saudi Arabia and Russia lowered its collective oil production target by 2mn barrels a day, or roughly 2 per cent of global consumption. The actual cut to supply will be less — probably closer to 1mn barrels — as many smaller members such as Nigeria are already producing below their targets.
Still, the move is an aggressive attempt to raise oil prices. At $90 a barrel, crude is well below levels reached soon after Russia’s invasion of Ukraine but higher than at any point between 2015 and early 2022. The pain of higher oil prices is compounded by the stronger dollar for many countries, which must buy their oil in the US currency. Petrol prices in the UK are above levels of 2008, when oil hit a record high of almost $150 a barrel, stoking inflation and a cost of living crisis.
Suhail Al Mazrouei, energy minister of the United Arab Emirates, said Opec+ was cutting to avert a price plunge like the one that took place in the second half of 2008, when oil collapsed to $30 a barrel during the financial crisis.
“We need to pre-empt a crash in the oil market because of the slowdown,” Mazrouei told the FT, arguing long-term investment in the industry would suffer without action.
Saudi Arabia’s energy minister, Prince Abdulaziz bin Salman, suggested they did not want to repeat recent mistakes of central banks, which he implied had erred by not reacting quickly enough to inflation.
But high energy prices themselves are a major driver of economic pessimism. The most damaging price surge was created by Russia as it curtailed gas supplies to Europe in an attempt to weaken the west’s support for Ukraine.
The cartel’s Gulf oil producers have been irritated by the US’s continued release of crude from its emergency stockpile. Washington has also spearheaded efforts to impose a price cap on oil exported by Russia. If the plan worked, the Gulf producers fear the price cap could drive down prices for their own oil — or one day be extended to them.
Backlash in Washington
The White House accused Opec+ of “aligning” with Russia and damaging the global economy. Jake Sullivan, president Joe Biden’s national security adviser, and Brian Deese, the top economic adviser, pointed to possible responses including more releases from the national Strategic Petroleum Reserve — a possibility the White House dismissed just a day ago. “Responsible action” to boost domestic energy production was also on the table.
The Biden administration also vowed to consult with Congress on ways to “reduce Opec’s control over energy prices”. The announcement suggested reviving so-called “Nopec” legislation, which would crack down on oil cartels by allowing the Department of Justice to sue countries for anti-competitive behaviour.
Helima Croft at RBC Capital Markets said that on top of the “dog whistle” Nopec hint, she believed the “more clear risk” was that the US would move to restrict exports of refined products such as petrol in an attempt to prevent fuel price inflation.
The blustery reaction reflected the depth of disappointment in Washington, whose diplomats lobbied hard in recent days to stop the cartel from announcing new cuts. Biden travelled to Saudi Arabia in July to patch up relations with Riyadh ahead of the US midterm elections.
Why Saudi-US tensions have grown
Sullivan and Deese did not question the US strategic and defence relationship with Saudi Arabia. Yet the split between Riyadh and Washington points to a broader disintegration in their decades-old energy alliance.
Biden described Saudi Arabia as a “pariah” during his election campaign — a reaction to the murder of journalist Jamal Khashoggi. Crown Prince Mohammed bin Salman has said he “does not care” if the US president misunderstands him. The two leaders’ carefully choreographed meeting in the kingdom this summer made clear there’s little affection between them. Months of petro-diplomacy to patch up relations, with White House officials repeatedly shuttling to Saudi Arabia — including in the run-up to this week’s Opec+ meeting — now appears to have hit a wall.
Saudi Arabia is also understood to be upset over what it believes is a lukewarm US commitment to the kingdom’s security, including the limited US response to the attack on its critical oil facility of Abqaiq in 2019, widely believed to have been carried out by Iran.
The kingdom has looked to diversify alliances, from China to Russia, with the former now a far bigger customer for its crude than the US.
The US still has significant leverage, however, as the kingdom’s biggest supplier of military equipment.
Oil market impact
The price of Brent crude oil reached $93.96 a barrel after Opec+ announced its cut, up from $84 a barrel last week. Jorge León, a former Opec analyst who is now at consultancy Rystad, expects oil to surpass $100 barrel by Christmas.
More price gains are possible as European sanctions tighten on Russian oil sales in December. Moscow has also warned it could cut oil exports to countries participating in the US price cap plan. Opec’s new production cuts, due to start in November, could therefore coincide with further falls in supply.
Years of under-investment across the industry meant supply is still constrained and global spare production capacity “extremely low”, the head of state-backed oil company Saudi Aramco warned this week.
While the production cuts will put “upward pressure” on prices, Christyan Malek at JPMorgan said the Opec+ intervention to keep oil prices high is designed to encourage all producers to start investing.
“The sheer size of the cut sends an important message to the industry,” he said.
What’s next for Opec+
Prince Abdulaziz, the older half-brother of Prince Mohammed, has set the kingdom on a more assertive course in oil policy.
People briefed on Saudi Arabia’s thinking believe Prince Abdulaziz is under pressure from his half-brother, the day-to-day ruler of the country, to ensure an oil price of about $100 a barrel to fund ambitious reform programmes.
The kingdom and its allies in the Gulf are unlikely to turn their back on Russia. The Gulf states have not spoken out against the Ukraine invasion, and bringing Russia closer to the Opec fold has been a long-term aim. Saudi Arabia and Russia are the world’s two largest oil producers after the US.
Questioned about Russia’s role in the energy crisis and whether it complicated their partnership, Mazrouei of the UAE said they did not want to take sides.
“In Europe they have their own story, in Russia they have their own story. We can’t be siding with this country or that country,” Mazrouei said.