As if it wasn’t troubled enough on the energy front. On Wednesday, the oil cartel OPEC+ announced a sharp cut in its joint production quota. From next month, it will fall by 2 million barrels per day – the biggest reduction since the corona crisis. Gas was already very expensive due to the Russian war in Ukraine because the Kremlin cut off the supply. Now the oil supply is also being turned down. Partly at the insistence of Russia, which would have had an important hand in the move.
Rumors of the production cut have already caused nervousness in the international energy markets in recent days. Several major oil prices (Brent, WTI) rose almost 10 percent – breaking with more than four months of price declines before that. When OPEC+ oil ministers decided on their measure on Wednesday, prices rose a bit further – although there was no real shock. Due to delayed investment and lack of maintenance, many OPEC countries have recently been producing below their current quotas. This means that they can already stay under the new quota without reducing their production much. As a result, the ‘supply shock’ is also slightly smaller than it first appears.
However, there was criticism. From, among others, the United States, itself one of the largest oil producers in the world, but not a member of the cartel. President Biden can use high gas prices badly in the run up to midwayelection next month. Washington had therefore previously put pressure on the alliance not to take too radical decisions. After announcing Wednesday, Biden called the decision “short-sighted.” There was also criticism from Europe. Because the continent is already struggling enough with rampant inflation fueled by extreme energy prices.
Within the cartel, Saudi Arabia, with a production of 12 million barrels per day, by far the most dominant member, largely sets the course. But it was Russia, also one of the biggest oil producers in the world and also an important voice in OPEC+, which is said to have pushed for the reduction. There is a lot at stake for Russia. In two months, the EU will introduce an import ban on Russian oil. That oil is likely to be bought by Asian countries such as China and India. But enough with the cool discounts. Then it is useful if the market price is already a bit higher.
Just on Wednesday, the G7 and the EU decided on a new oil sanction against Russia
Just on Wednesday, the G7 together with the EU also decided on another oil sanction that will harm Russia. In December, there will be a limit on the price at which Russian oil can be sent via EU countries (such as Malta, Cyprus and Greece) to non-EU countries.
In addition, Russia earns less and less from its gas trade. Although Russian President Putin’s ‘gas weapon’ has pushed prices to the limit, Russia now barely supplies Europe. Almost all pipelines are closed or broken. That gas cannot easily go elsewhere; the infrastructure is lacking. In it Financial Times A market analyst at a major Western investment bank therefore concludes that Russia appears to have set its sights on disrupting the oil market now that its gas arsenal would wear out.
Saudi Arabia, along with Russia, will account for the bulk of the cut, both 526 million barrels per day less. The country’s support for the cut is not surprising. Riyadh reportedly fears a global recession, caused in part by interest rate hikes in the West, which in turn are aimed at fighting inflation, which will reduce demand for energy. It’s a proven recipe: before demand falls, supply falls, so prices remain attractive.
With the move, Riyadh risks a possible American backlash. Last summer, Biden paid a visit to Saudi Arabia, where he called for an increase in production. That visit was controversial because, as a presidential candidate, he had said he would make Saudi Arabia a “pariah state” because of the murder of dissident journalist Jamal Khashoggi, presumably at the behest of Saudi Crown Prince Mohammed bin Salman (MBS). Biden swallowed the criticism because he needed Saudi Arabia to deal with high US gas prices and to isolate Russia after its invasion of Ukraine.
Since then, Riad has admittedly gradually increased oil production, but is now adjusting the course again. A prominent Democratic delegate wrote on Twitter that the US must “make it clear to the Saudis that we will supply zero parts for their aircraft if they cut oil production to bolster Putin.” […]”