Recognition…Heinz-Peter Bader/Reuters
OPEC Plus, the group of oil producers, is considering announcing a sharp cut in production at its meeting on Wednesday, according to a person familiar with the mindset 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 pushed the Saudis to increase production.
A cut would also mean a major reversal in the policies of OPEC Plus, which includes Russia. Since the group cut oil production in early 2020 as demand slumped due to the coronavirus pandemic, producers have announced a series of steady monthly increases, though they’ve generally fallen short of those targets.
Analysts say the Saudis appear determined to take oil prices to around $90 a barrel. Oil prices, which stood at about $85 a barrel on Friday for Brent crude, the international benchmark, are down about a quarter from their June high.
Oil prices in Europe and the United States rose 4 percent on Monday.
“We certainly see a strong opportunity for the producer group to decide on a significant cut to signal that there is indeed an effective circuit breaker out there,” said Helima Croft, head of commodities strategy at RBC Capital Markets, an investment bank. said last week. Ms Croft estimated the group is considering announcing a cut of 500,000 to 1 million barrels a day, about 1 percent of global supply.
The person familiar with Saudi Arabia’s thinking also said a cut of that magnitude was likely. In his view, the oil market is oversupplied and demand is weakening due to a weakening global economy.
The Saudis signaled a hawkish stance last month with a largely symbolic cut of 100,000 barrels a day. Now, analysts say, they might think it’s time to make a stronger statement.
A sizeable cut by Saudi Arabia appears to be an act of resistance to the Biden administration, which has been pushing the Saudis and other OPEC members to supply enough oil to keep prices under control. President Biden visited the kingdom in July, despite disapproving of the 2018 killing of Saudi dissident Jamal Khashoggi by Saudi activists.
OPEC Plus appears to be attempting to intervene in an elusive market. Much of the recent price drop may be due to worries about factors such as rising interest rates from central banks around the world, rather than oil market fundamentals. In addition, it is far from clear how the global economy will develop in the coming months. Still, an OPEC Plus cut in oil supplies raising oil prices could increase the likelihood of a global downturn.
While prices may be under pressure, oil inventories — the amounts in storage tanks — are at low levels, meaning the market could turn quickly.
A big unknown is the future production of Russia, the co-chair of OPEC Plus. Russian oil production has held up better than many analysts expected amid Western sanctions over the war in Ukraine. But Russian production could fall even further if the European Union tightens sanctions on Russia later this year.
What OPEC Plus understands by a cut may also be anything but clear. The group has already missed their targets by a proverbial mile. For example, in August Russia missed a million barrels from its daily quota of 11 million barrels, according to the International Energy Agency, a Paris-based group.
To be taken seriously by markets, a cut will likely have to include a significant reduction by Saudi Arabia, the group’s largest producer.
Also uncertain is the status of Russia 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, though sanctions are likely to make it difficult for Moscow to even come close to meeting current production targets. Moscow’s oil and gas industry also seems to be headed for a fairly certain decline in the medium term because Western companies will no longer supply them with technology. The Saudis appear to be betting that Russia will remain a major player in energy markets despite these negative developments.
The Saudis are also trying to ensure that OPEC Plus continues. The oil deal on production management that ties OPEC Plus together expires at the end of the year. The Saudis want the market management arrangements to continue, but detailed talks on extending the deal will likely be required. The need to have such talks soon may be a key reason the group decided to convene in Vienna on Wednesday, their first face-to-face meeting since the pandemic began.
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