According to people familiar with the discussions, the OPEC+ oil coalition is considering a sizable production cut to support falling prices, as the group prepares to meet in person for the first time since March 2020.
At its meeting on Wednesday, the oil group, co-chaired by Saudi Arabia and Russia, is expected to discuss a production cut that might affect more than a million barrels per day. This represents more than 1% of global supplies and is by far the largest since the start of the pandemic.
The move might spark a rift with the US, where President Joe Biden has been working to lower gasoline prices for drivers ahead of next month’s crucial midterm elections, and threatens to raise prices of oil at a time when much of the world is struggling to reduce energy costs.
However, according to two people briefed on Saudi Arabia’s thinking, Saudi Arabia is willing to cut production to support prices and keep some production capacity in reserve. The monarchy is concerned that if Western sanctions once morest its oil exports are tightened, Russian output might fall significantly this year.
As buyers have forced deep discounts on their oil shipments in the wake of their full-scale invasion of Ukraine, Russia is also believed to be in favor of a cut. Russia has seen its oil revenues decline in recent months. Due to the ruble’s recent strength, it now receives less money from domestic oil sales that are priced predominantly in US dollars.
OPEC+’s announcement this weekend that the group would hold its monthly meeting in person at its Vienna headquarters, rather than online, raised the notion that a significant policy change would be considered.
The reduction might reach between 500,000 b/d and 1m b/d for the group as a whole, according to sources close to the negotiations, although Saudi Arabia might add another unilateral production cut.
Energy Aspects’ Amrita Sen said the company was “considering big cuts to get ahead of any future demand reaction” as the organization was particularly concerned regarding the risk of a global recession and its impact on consumption growth in the US. emerging nations.
The company has spent most of the last two years adding barrels back to the market following cutting production in April 2020 when oil demand fell due to the pandemic.
In July, Biden made a controversial trip to Saudi Arabia, where he met with the country’s daily ruler, Crown Prince Mohammed bin Salman, to discuss various issues, including oil production.
MBS, as he is known, has previously drawn criticism from Biden for his apparent involvement in the death of journalist Jamal Khashoggi.
However, following ramping up output over the summer, Saudi Arabia signaled a change in strategy last month, prompting the OPEC+ group to make a slight adjustment to oil output targets of regarding 100,000 b/d as oil prices increased. oil prices fell.
The price of Brent crude, the world standard, has fallen from regarding $120 a barrel in early June to regarding $85 a barrel.
Saudi Arabia’s longstanding connections to the United States have occasionally clashed with its oil partnership with Russia, which allowed Moscow to join the larger OPEC group in 2016. Riyadh, however, has wanted to carve out a more independent position.
The world’s second and third largest oil producers, Saudi Arabia and Russia, respectively, are significantly more dependent on energy revenue than the world’s largest economy.
In an effort to deprive Moscow of funding for the Ukraine invasion, the US is eager to target Russia’s oil revenues, but is also concerned regarding rising oil prices if too much supply is withdrawn from the market. .
To keep Russian barrels of oil on the market while decreasing the money the Kremlin receives, Washington has pushed the G7 to enact a so-called price cap on oil shipments from Russia.
If a price cap is achieved, the United States and the United Kingdom are also expected to apply insurance bans on any ship carrying Russian oil, to be tightened by the EU in December.
Prince Abdulaziz bin Salman, the first royal to hold the post and MBS’s half-brother, has repeatedly warned that the company has little manufacturing capacity left to make up any shortfall.
Additionally, he has pointed to increased “volatility” and gaps between the financial and physical oil markets, saying he thinks oil traders are underestimating market risks.