OPEC Meets Tomorrow…as Saudi Arabia, Russia Drive Plans to Cut Oil Production

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By Reporter 

Saudi Arabia and Russia are driving plans by the world’s most oil-rich nations to cut oil production and therefore prop-up prices, while the rest of the world battles to lower energy costs in the face of Vladimir Putin’s on-going war in Ukraine.

The cut will not affect Nigeria, as the country is presently producing below allocated production, due to oil theft and mismanagement in the sector.

The 13 members of the Organization of the Petroleum Exporting Countries (OPEC), led by Riyadh, and their 11 allies headed by Moscow will on October 5, 2022, hold their first in-person meeting since March 2020.

At the meeting at the group’s Vienna headquarters, it is expected OPEC will agree to its biggest output cut since the start of the Covid-19 pandemic in efforts to buttress prices – to the benefit of Putin.

Energy prices soared after Putin ordered the invasion of Ukraine in February, pushing inflation to decades-high levels that has put pressure on economies across the world and contributed to post-pandemic cost-of-living crises in several nations.

But crude prices have fallen in recent months on concerns over demand amid a slowdown in the global economy.

Consumer countries have pushed for OPEC+ to open taps more widely to bring down prices – calls which the group has largely ignored, to the pleasure of Putin.

The Russian leader has used his leverage over the oil and gas markets as a way to counter the crushing Western sanctions imposed on Russia over his invasion.

He is hoping that the pressure he is exerting on the markets will divide the West in its support for Ukraine, before he suffers any further military embarrassments.

The Organization of the Petroleum Exporting Countries (OPEC) consists of 13 member nations, while OPEC+ has an additional 11 member countries. Between them, they have huge control over the globe’s oil market and prices.

As of September 2018, the 13 OPEC members accounted for an estimated 44 percent of global oil production, and 81.5 percent of the world’s proven oil reserved. The group can manipulate oil prices by setting production targets. Generally speaking, when targets are reduced, oil prices increase.

According to Daily Mail, some analysts have characterised OPEC as an example of a cartel that corporates in market competition, while being protected by state immunity.

OPEC+ was formed in 2016, bringing 11 more nations into the fold – including Russia – giving the group even more control over the global oil market.

Collectively known as OPEC+, the alliance drastically slashed its output by almost 10 million barrels per day in April 2020 to reverse a massive drop in crude prices caused by global Covid-19 lockdowns.

OPEC+ only began to raise production last year after the market improved – output returned to pre-pandemic levels this year, but only on paper as some members struggled to meet their quotas.

The group agreed last month on a slight cut of 100,000 bpd from October, the first in more than a year.

Analysts now expect – and financial media have reported – that OPEC+ will discuss taking one million bpd out of the market from November at Wednesday’s meeting.

‘There’s been plenty of rumours about how the alliance will respond to the deteriorating economic outlook and lower prices,’ said Craig Erlam, analyst at trading platform OANDA.

‘A sizeable cut now looks on the cards, the question is whether it will be large enough to offset the demand destruction caused by the impending economic downturn,’ he added.

After soaring close to $140 per barrel in the aftermath of Russia’s invasion of Ukraine, oil prices have dropped below the $90 mark.

According to the UBS bank, a cut of at least 500,000 bpd would be necessary to stop the price plunge.

In anticipation of Wednesday’s meeting, oil prices jumped on Monday, with Brent North Sea crude, the international benchmark, rising by almost five percent to reach $89.15 – still far from its March peak.

Stephen Brennock, an analyst with PVM Energy, said OPEC+ would ‘want to reassert its influence’ when the group meets this week. ‘After all, the producer group has lost control over the oil market in recent weeks,’ he said.

It remains to be seen how the United States and other major oil consumers will react to any OPEC+ decision to slash output.

‘OPEC will not be making any friends among Western leaders, especially petroleum importers whose economies and currencies are ravaged by higher oil prices due to a deterioration in the trade balance,’ said Stephen Innes, an analyst with SPI Asset Management, ahead of Wednesday’s meeting.

Observers have cast doubt how much more OPEC+ could possibly be pumping with some of its members struggling to meet quotas.

Bjarne Schieldrop, chief commodities analyst at SEB research group, predicted it would be ‘very easy for the group to implement cuts given that most members are stretched to the limit of what they can produce’.

He said Saudi Arabia was currently producing 11 million barrels per day.

‘It hasn’t maintained such a high production more than twice in history and then only for 1-2 months,’ he said.

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