In recent weeks, OPEC+ has been considering a significant reduction in oil production. The markets were forewarned, the announcement was only a matter of time. But no one anticipated the magnitude of the measure. The energy cartel agreed to cut production by 2 million barrels per day, the equivalent of 2% of the world's crude oil supply. A cutback ostensibly greater than expected that will further tighten prices. No one was satisfied with the measure. No one, of course, except the 23 exporting countries. Russia in particular.
The move, which will come into effect in November, marks the biggest production cut by OPEC+ in two years. However, the actual cut is likely to be limited to one million barrels, as some countries have been producing oil below their targets. The last time the alliance made such a decision, the COVID-19 pandemic was beginning to spread around the world. It was March 2020. At that time they unanimously decided to cut production by more than nine million barrels per day. Prices were at rock bottom and demand was close to an all-time low.
The current scenario is different. The energy crisis provoked by Russia to undermine Western support for Ukraine has already affected more than half the world and has led to an unprecedented rise in prices. It is in the interest of demand countries to increase supply and thus ease the pressure on markets. Producers, however, are moving in a different direction. The best example of this is the decision taken within OPEC+, which aims to boost prices again and double its profits, precisely at the expense of the crisis.
"The global oil market has interpreted the cut as nothing more than balancing the books as a result of OPEC+'s underproduction in the previous four months, and therefore what is announced as a 2.0 million barrels per day (mbd) cut could be reduced to 500,000 or no cut at all. In short, this is a brilliant magic act on the part of the organisation," oil economist and World Bank consultant Mamdouh Salameh tells Atalayar.
It is all said and done. Oil prices rose by 5% on Friday, even before the OPEC+ face-to-face meeting in Vienna at which the members were to make the cut. The first face-to-face meeting, by the way, since March 2020. Once the measure was announced, on Wednesday afternoon, the price of a barrel of Brent - the benchmark in Europe - surpassed 93 dollars, compared to the 84 it had reached the previous week. Market shock. The charts showed the highest price in seven years, with the exception of the first few weeks of the invasion.
Pressure from the United States fell on deaf ears. US diplomacy tried until the last minute to persuade Saudi Arabia, the unofficial leader of the group, to reverse the decision or, at the very least, to cushion it. There was no way. Riyadh prioritised the benefits over its relations with Washington, which are perhaps at their lowest ebb since the founding of the Wahhabi kingdom. Saudi Energy Minister Prince Abdulaziz bin Salman justified the decision on the grounds that the market needed to encourage investment. Asked about the West's reactions, the minister responded defiantly: 'Show me where the act of belligerence is'.
The Biden administration came down hard on the OPEC+ move. White House spokeswoman Karine Jean-Pierre called the energy cartel aligning itself with Russia. While the president's top national security and economic advisers, Jake Sullivan and Brian Deese, issued a joint statement pointing in the same direction. Riyadh and Moscow's agendas and interests, at least on this issue, converge.
"Russia suggested and got the deal and Saudi Arabia accepted because its cooperation with Russia has been absolutely beneficial," Salameh says.
The measure benefits the Kremlin's coffers. The lower the production, the lower the supply. And the lower the supply, the higher the prices. Russia will be able to collect more energy revenues, which will be used mainly to recover its war machine in Ukraine, which has been hit hard in recent weeks by the advances of Kiev's forces. For this reason, both Washington and Brussels have been considering imposing a limit on the price of Russian gas, a measure that would relax the markets but could affect the rest of the producers, who take a dim view of it.
President Biden's visit to Saudi Arabia in July seems to have been of no use. Riyadh remains dissatisfied with the lack of involvement of its administration in the kingdom's security, among other issues. This has prompted the Saudi government to seek affection in other capitals such as Moscow and Beijing. In any case, the US has not lost much ground on Saudi soil. It continues to be the desert kingdom's largest arms and military supplier, a factor it can use in the short to medium term. This will not be easy because, although it leads OPEC+, there are more voices in the group.
"The Biden administration, which called the OPEC+ decision short-sighted, does not know how to respond," Salameh points out. "It cannot increase US shale oil production or release more oil from its Strategic Petroleum Reserve (SPR), which is at its lowest point since 1984. Moreover, the Energy Department will find it virtually impossible to replace past releases from the SPR because of the tight market."
The Organisation of Petroleum Exporting Countries plus (OPEC+) is a group of 23 countries - the hard core is only 13 - mostly from the Middle East and Africa, as well as Latin America, which has the capacity to produce around 40 % of the world's oil. They set the level of production and decide the amount of supply they release to the world market. They operate as a cartel, unrestrained, and the major producers often impose their interests over those of the rest.
Speaking to the Financial Times, UAE Energy Minister Suhail Al Mazrouei acknowledged that the group "could not take the side of this country or that country". "In Europe they have their own history, in Russia they have their own history," he said. The group, he said, is seeking at all costs to avoid a general price collapse similar to that of 2008, when prices hit record lows. The reality is that no OPEC+ member has taken any hostile action towards Russia as a result of its aggression over Ukraine. Silence wins out.
"It seems that the truth is much simpler: in the current market conditions, it is not reasonable for OPEC to make sudden moves to saturate the market or to remove a significant number of barrels from the market to please anyone," writes analyst Nikolay Kozhanov in the Middle East Institute. "The market situation remains unpredictable and the main OPEC players are not interested in forming an anti-Russian camp. Even with the expected production losses, Moscow remains a major producer whose word can exert psychological pressure on the price environment," he writes.
Americas Coordinator: José Antonio Sierra.