Friday, December 02, 2022

OPEC to cut oil supply to boost prices

OPEC to cut oil supply to boost prices

The OPEC+ oil alliance is considering a major production cut to support falling prices, according to people familiar with the discussions, as the group prepares to meet in person for the first time since March 2020.

In its meeting on Wednesday, the oil group, co-chaired by Saudi Arabia and Russia, could discuss production cuts that could affect more than a million barrels a day. This represents more than 1% of the global supply and is by far the largest since the start of the pandemic.

The move could spark a rift with the US, where President Joe Biden is working to slash gasoline prices for drivers ahead of next month’s crucial midterm elections, and threatens to raise oil prices at a time like when much of the world is struggling to reduce energy expenditure.

However, Saudi Arabia is willing to cut production to support prices and reserve some production capacity, according to two people familiar with Saudi Arabia’s thinking. The monarchy is concerned that Russian production could drop significantly this year if Western sanctions against its oil exports are tightened.

As buyers have forced significant discounts on their oil shipments in the wake of their full-scale invasion of Ukraine, Russia is also considered in favor of the cuts. Russia has seen its oil revenue decline in recent months. Due to the recent strength of the ruble, it now makes less money from the sale of domestic oil that is mainly denominated in US dollars.

OPEC+’s announcement later this week 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.

According to sources close to the talks, the shortfall for the group could reach between 500,000 b/d and 1m b/d, although Saudi Arabia could add another unilateral production cut.

Energy Aspects’ Amrita Sen said the company was “considering major cuts to outweigh any future demand response” as the organization is particularly concerned about the risk of a global recession and its impact on consumption growth in the US. was. emerging countries.

The company has spent the past two years adding barrels back to the market after cutting production in April 2020 when oil demand fell due to the pandemic.

In July, Biden made a controversial visit to Saudi Arabia, where he met with the country’s daily ruler, Crown Prince Mohammed bin Salman, to discuss a variety of issues, including oil production.

MBS, as he is known, had previously criticized Biden for his apparent involvement in the death of journalist Jamal Khashoggi.

However, after a summer production boom, Saudi Arabia signaled a change of strategy last month, prompting the OPEC+ group to make slight adjustments to its oil production target of around 100,000 b/d as oil prices rise. inspired to. Oil prices fell.

Globally, the price of Brent crude has fallen from around $120 a barrel in early June to around $85 a barrel.

Saudi Arabia’s longstanding relationship with the United States sometimes clashes with its oil partnership with Russia, which allowed Moscow to join the larger OPEC grouping in 2016. Riyadh, however, wants to create a more independent position.

The world’s second and third largest oil producers, respectively Saudi Arabia and Russia, rely significantly more on energy revenues than the world’s largest economies.

In an effort to deprive Moscow of funding for its invasion of Ukraine, the US is keen to target Russia’s oil revenues, but is also concerned about rising oil prices if too much supply is withdrawn from the market.

To keep Russian barrels of oil on the market while reducing the money the Kremlin receives, Washington has prompted the G7 to impose 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 impose insurance restrictions on any ships carrying Russian oil, which will be tightened by the European Union in December.

Prince Abdulaziz bin Salman, who is the first royal to hold office and half-brother of MBS, has repeatedly warned that the company has too little manufacturing capacity left to make up for any shortfalls.

Additionally, he pointed to increased “volatility” and gaps between financial and physical oil markets, saying he thinks oil traders are underestimating market risks.

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