OPEC+ considering major production cut to prop up oil prices

OPEC+, an oil producers group, is considering announcing a major cut in production when it meets Wednesday, according to a person familiar with the thinking of Saudi Arabia, the group’s de facto leader. Such a move, which analysts say is widely expected, would be a blow to the Biden administration, after it lobbied the Saudis to increase output.

A cut would also mark a major turnaround in policy for OPEC+, which includes Russia. Since the group slashed oil production in early 2020 when demand collapsed because of the coronavirus pandemic, the producers have announced a series of steady monthly increases, although they have generally not met those goals. Analysts say that the Saudis appear determined to bring oil prices up to about $90 a barrel. Oil prices, now about $85 a barrel for Brent crude, the international benchmark, have fallen by one-fourth since their June high.

“We certainly see a significant chance that the producer group will opt for a substantial cut to try to signal that there is indeed an effective circuit breaker in the market,” Helima Croft, head of commodity strategy at RBC Capital Markets, an investment bank, said last week. Croft estimated that the group was considering announcing a cut of 500,000 to 1 million barrels a day, roughly 1% of the global supply.

The person familiar with the thinking of Saudi Arabia also said a cut of that size seemed likely. In his view, he said, the oil market is oversupplied and demand is weakening because of a flagging world economy.

The Saudis signaled a hawkish posture last month with a largely symbolic cut of 100,000 barrels a day. Now, analysts say, they may think it is time to make a stronger statement.

A sizable cut by Saudi Arabia would appear to be an act of defiance of the Biden administration, which has pushed the Saudis and other OPEC members to supply enough oil to keep a lid on prices. President Joe Biden visited Saudi Arabia in July despite his disapproval of the 2018 murder of the Saudi dissident Jamal Khashoggi by Saudi operatives.

OPEC+ appears to be trying to intervene in a market that is difficult to read. Much of the recent fall in prices may be the result of worries about factors such as rising interest rates by central banks around the world rather than oil market fundamentals. In addition, how the world economy will perform in the coming months is far from clear. Still, a cut in oil supplies by OPEC+ that raises oil prices could increase the likelihood of a global downturn.

Although prices may be under pressure, oil inventories – the volumes in tank farms – are at low levels, meaning that the market could turn around quickly.

A major unknown is the future output of Russia, co-chair of OPEC+. Russian oil production has held up better than many analysts expected under sanctions imposed by the West over the war in Ukraine. But Russian production may fall more when the European Union tightens sanctions on Russia later this year.

Just what OPEC+ means by a cut may also be far from clear. The group has already been missing its targets by a proverbial mile. In August, for instance, Russia came up short a million barrels of its daily quota of 11 million barrels, according to the International Energy Agency, a Paris-based group.

To be taken seriously by the markets, a cut will probably need to detail a substantial reduction by Saudi Arabia, the largest producer in the group.

Also uncertain is Russia’s status in the organization. The Saudis appear to want to keep Russia, one of the world’s largest oil and natural gas producers, as a key member of the group, even though sanctions will probably make it difficult for Moscow to meet anything close to current production targets. Moscow’s oil and gas industry also appears headed for almost certain medium-term decline because Western companies will no longer supply it with technology. The Saudis appear to be betting that despite these negatives, Russia will remain a key player in energy markets.

The Saudis are also trying to make sure that OPEC+ continues. The oil agreement on production management that binds OPEC+ together expires at the end of the year. The Saudis want the market-management arrangements to continue, but detailed discussion will probably be required on extending the deal. The need to hold such talks soon may be a key reason the group decided to convene in Vienna on Wednesday, its first in-person meeting since the start of the pandemic.