OPEC’s cartel of oil-producing countries has announced production of two million barrels consistent with the day.
This is a dramatic replacement for the group, which accounts for about 44% of global oil production.
Although expectations of a significant drop – first a million barrels, then a year and a half and then two – have risen in recent days, it is nonetheless a strong message from OPEC (OPEC and allies such as Russia) that the fall in oil costs since May has gone too far and will have to be addressed.
It is also a close to the United States.
After all, it’s been less than three months since the U. S. president has been in charge of the U. S. US President Joe Biden visited the Kingdom to try to convince Crown Prince Mohammed bin Salman to increase production, despite his promise to make Saudi Arabia “a pariah” following the murder of journalist Jamal Khashoggi.
A relief in production of this magnitude will exacerbate the tightening of sources and raise the price of crude oil and, with it, inflation.
The West faces an uphill war against recession
The West now faces an even harder war to deal with a recession this winter. Germany, Europe’s largest economy, is already at its peak in recession, while the UK is not far behind.
OPEC’s Joint Ministerial Monitoring Committee, which made the advice (which will need to be officially approved by oil ministers), met at OPEC headquarters in Vienna. This was the first face-to-face meeting organized through the poster in two years and the largest of the time.
The move Saudi Arabia and Russia, the two countries most clamoring for maximum competitive output cuts, appear to have outperformed other OPEC members, adding the UAE, which had called for restraint.
Saudi Arabia had pushed for a production cut of at least 1. 5 million barrels consistent with the day.
The cartel’s most important and most important member has been affected by falling crude prices in recent months.
Brent crude peaked at $139. 13 (£122. 96) per barrel on March 7 shortly after the invasion of Ukraine, but then drifted until mid-April before hitting $125. 28 (£110. 73) in late May.
But it has fallen sharply since then, basically due to the deterioration of the global economic outlook, partly caused by China’s new wave of COVID lockdowns and partly due to the competitive action of the central bank, i. e. the US Federal Reserve. In the US, to combat inflation. Since late May, Brent crude has fallen 33% to its lowest point seven sessions ago, since then rebounding on the prospect of today’s production cuts.
The Saudis were keen to prevent their costs from falling further.
Russia a big cut in production
Russia was the other major player pushing for significant relief in production. The country, which had already cut production by about 10% from its peak, was forced to sell its crude at a much lower price compared to market value due to a boycott across most Western countries. Most of those resources were recovered through China and India. Therefore, he was also willing to see a cut in production to crude prices and keep the money in the Kremlin’s coffers while waging war on his neighbor.
The seriousness with which Russia took the assembly was demonstrated by the fact that Alexander Novak, Russia’s longtime energy minister and now its deputy prime minister, attended in person. Novak, who has been under U. S. sanctions since last Friday, is the tallest. Senior Russian official has ventured west since Vladimir Putin attacked Ukraine in February this year.
Read more: Oil costs will rise as two million fewer barrels are produced each day
Facing Russia and the Saudis were other OPEC members, led by the United Arab Emirates but also Kuwait, who feared that a sharp cut in production would hamper their ability to increase production in the long term and who invested heavily in capacity expansion.
Some OPEC members will also worry that production cuts will backfire because, if they lead to higher prices, it will translate into higher inflation, and central banks are very likely to raise interest rates more aggressively in response. line.
Prices are going up
So where does crude oil pass from here?
In the short term, the price has risen in recent days, as the market has to compare in anticipation of a larger-than-expected relief in production. Brent hit $93. 20 (£82. 39) a barrel, its highest level since Sept. 21. – and is up 10% from its recent high low on Monday last week.
But there are some unknowns that make it harder to expect how much it will increase in the coming weeks.
The first question is whether the price cap on Russian crude agreed by the G7 will work. The cap, to be signed in Brussels on Wednesday, would put the price of Russian crude at a lower point than it has recently sold and aims to hit the Kremlin. Oil revenues to the song of tens of billions of dollars a year.
However, to operate, it will require giant buyers of Russian crude, basically China and India, to adhere to it: the U. S. government will not be able to do so. U. S. He estimates that even if they don’t, Russian crude costs will fall by 30 to 40 percent.
If the value cap works, Russia is expected to respond by preventing sales to countries that enforce it, which could exacerbate the shortage.
As RBC Capital Markets’ Helima Croft told CNBC on Wednesday: “This sets us up for a significant jump [in price] until the end of the year. We’re set up for $100 (£88. 39). ) consistent with the barrel environment. “
OPEC members themselves will be watching to see if the cap works. Many, with questionable human rights records, fear facing a similar long-term remedy if the cap on Russian crude succeeds in stopping the flow of dollars to the Kremlin.
Biden Possibly Wouldn’t Want to See a Rise in Fuel Prices
The unknown moment is the American response.
The White House had tried to exert pressure and made that clear ahead of the meeting, adding that Saudi Arabia was very dissatisfied with the prospect of cutting production.
The United States can simply respond by freeing up more reserves from its Strategic Petroleum Reserve (SPR). This, however, would be risky as U. S. stockpiles are already at their lowest point in 38 years and more recent discussions have focused on when the administration intends to start filling the SPR after recent reserve releases.
Read more on Sky News: Energy value guarantee could charge taxpayers £140 billion in ‘extreme’ situation Average loan interest rate above 6%, since 2008
However, a new strategic release from the United States seems likely, as Biden may not see an increase in fuel costs until next month’s midterm elections in the United States.
Ms. Croft told CNBC, “The reaction of courage will dictate the reaction of the White House. “
Another unknown, at this point, is that the proposed production cut is nominal or real, that is, it takes into account OPEC’s existing underproduction.
The cartel has very little surplus production capacity at the moment, with the exception of the Saudis, meaning it has missed its production targets for the year’s peak, on the verge of 3 million barrels per day. Therefore, market participants will be asked to explain whether this deficit is included.
But the West has been warned that OPEC needs higher costs and will stand firm until they are higher.