Russia won. OPEC cuts oil production

After the gas market, the oil market is becoming a weapon of Russia, experts say. The US is preparing a response.

The OPEC oil cartel, which includes the largest oil producers, has decided to aggressively cut production by two million barrels a day. Experts expect that because of this, oil prices will remain at the level of $90 per barrel. The United States asked on the eve that Saudi Arabia, Kuwait and the UAE refuse to cut production, because the increase in oil prices will help Russia earn money for the war against Ukraine. Correspondent.net telling the details.

What was OPEC’s decision?

OPEC at a meeting in Vienna on Wednesday decided to reduce production quotas by two million barrels per day in November. Thus, the largest oil producer chose the most difficult of the deal options discussed.

Also, OPEC members decided to extend oil market coordination until the end of 2023 – the previous deal formally expired at the end of the year. Now ministerial meetings are held not every month, but every two months, but an extraordinary meeting can be held at any time.

Thus, the OPEC production increase cycle, which began in the summer of 2020 and continued until September 2022, has officially ended.

Although the level of production quotas in October formally corresponded to the base level of quotas set at the very beginning of the deal, in fact, OPEC countries produced 3.5 million barrels per day below their quota .

It is assumed that OPEC’s decision could reverse the downward trend of oil prices: the price of Brent oil in September fell by 20 percent, to $82 per barrel, the last time it was valued in January of this year. With OPEC’s decision to reduce quotas on October 5, the price of Brent exceeded $94 per barrel.

The market reaction was subdued, as the quota was reduced twice as much as expected, said Alexander Isakov, an economist at Bloomberg Economics for Russia and Central and Eastern Europe. “Probably, the introduction of the quota will not lead to an increase in oil prices above $100 per barrel,” he said.

The organization noted that they are only trying to ensure the stability of the energy market. “We are not threatening the energy market. We are ensuring its stability and security,” said OPEC Secretary General Haytham al-Ghais.

And OPEC countries have declared that they are guided by their own interests. “Show me where the militancy is,” said Saudi Energy Minister Abdelaziz bin Salman.

What were the US responses?

OPEC’s actions, among other things, hit the Democratic administration’s efforts in the US to contain domestic fuel prices against the backdrop of the upcoming November midterm elections in Congress.

The White House called OPEC’s decision a mistake and warned that high energy prices would fuel inflation.

“OPEC’s decision to reduce production quotas is short-sighted at a time when the global economy is facing the continuing negative effects of Putin’s aggression in Ukraine. If OPEC’s decision has a significant impact on prices, it will hit in low- and middle-income countries it is especially difficult,” said White House press secretary Karine Jean-Pierre.

Later, a statement by US President Joe Biden appeared on the White House website with the same words. It was announced that the US Department of Energy, at the behest of Biden, will deliver another ten million barrels from the Strategic Petroleum Reserve (SPR) to the market next month.

“The President will continue to manage releases from the SPR as necessary to protect American consumers and ensure energy security,” the White House said in a statement.

Also, the Biden administration will consult with Congress about additional tools and powers to loosen OPEC’s control over energy prices.

On October 7, US Secretary of State Anthony Blinken said that Washington is considering retaliatory measures, including in the field of relations with Saudi Arabia.

According to Wall Street Journal sources, the United States may reduce anti-Venezuelan sanctions, which would allow American Chevron to continue oil production in the country. The deal will open the way for Venezuelan oil to the US and European markets.

In exchange, the Biden administration is demanding talks with the opposition and holding “free elections” in 2024. According to the newspaper, the parties are also working on an agreement to unfreeze hundreds of millions of dollars in federal funds. Venezuelan to pay for imports of food, medicine and equipment.

Oil has become Russia’s weapon

“After the gas market, now the oil market is becoming a weapon,” analyst Roger Dyvan, who has followed OPEC for decades, told Bloomberg.

Helima Croft, director of commodities analysis at RBC Capital Markets and a former CIA analyst, expressed similar sentiments before the cartel meeting, when reports emerged of Saudi Arabia and Russia’s desire to cut oil production. two million barrels.

By cutting gas supplies to Europe, Russia can now act to destabilize the oil market, he said.

In reality, the market will lose less oil than stated. Many countries do not choose quotas, and Saudi Arabia, the United Arab Emirates and Kuwait have to cut production in OPEC first of all. If they adhere to the quotas, the real reduction could be about a million barrels per day.

However, in the West, the decision made by the Saudis is considered confrontational. The desire to go for such a large reduction in oil production is due to geopolitics, and not just market fundamentals, argues Ben Cahill, senior fellow at the Center for Strategic and International Studies.

“OPEC is resisting attempts by oil importers to influence the market, including a ceiling on the price of Russian oil, the use of US oil reserves and coordinated actions by consumers. It is a dangerous step,” said the expert.

OPEC’s decision came hours after the EU agreed to an eighth package of sanctions against Russia, which includes a price ceiling for Russian oil. The restrictions are due to take effect from Dec. 5 for crude oil and Feb. 5 for petroleum products, when the European embargo goes into effect.

Amrita Sen, chief oil analyst at Energy Aspects, called OPEC’s decision “highly political” and “a very clear sign of the cartel’s dissatisfaction with the price ceiling” for Russian oil.

“Regardless of whether the ceiling will be effective in reality, they see it as a dangerous precedent,” – said the expert.

OPEC considers the EU’s eighth package of sanctions against Russia as a prerequisite for a threat to itself that a certain cartel of consumers can form a threat to the cartel itself, said Marcel Salikhov, president of the Institute of Energy and Finance.

“And in this sense, such mechanisms are also a threat to other member countries of the organization. Under these conditions, they decided to act proactively: in fact, the decision to reduce production supports oil prices , reduces supply and makes it difficult for Western countries to introduce an effective price ceiling,” – quoted the expert in BBC News.

Under OPEC, Russia doesn’t have to do anything, as it produced 9.9 million barrels per day in September against a quota of 11 million. “Russia wins here, while the global consumer loses, which does not need high energy prices in a situation of economic slowdown,” said Ole Hansen from Saxo bank.

Bill Farren-Price, of consultancy Enverus, which has long analyzed OPEC, told Britain’s Financial Times that Saudi Arabia had set OPEC on a collision course with the free world.

“They cooperated with Russia in the name of protectionist management of the oil market – as consumers around the world struggle with inflation and rising cost of living. Riyadh will definitely face political consequences,” the expert said.