Column by Yuri Barsukov about the efforts of OPEC+ leaders to curb oil prices

OPEC+ countries will hold another meeting this week, which will significantly determine the dynamics of oil prices this winter. The market is waiting for the key participants in the deal – Saudi Arabia and Russia – to at least confirm the voluntary production cuts made during the summer, which formally should be completed at the end of the year.

Together, OPEC+ leaders then removed about 1.4 million barrels per day from the market, while the measure was presented as temporary: Saudi Arabian Oil Minister Abdulaziz bin Salman called it “candy for the market.” But now the industry is wondering whether Riyadh will have the patience to continue handing out candy at a time when prices may once again test the kingdom’s minimum acceptable $70 per barrel, global oil demand is not growing as quickly as expected, and the production of competitors outside the in OPEC+ (primarily the USA), increases.

In a certain sense, this is a zugzwang, since Saudi Arabia clearly cannot refuse cuts: this will collapse prices, render the efforts already made meaningless and have a bad impact on relations within OPEC+. On the other hand, the kingdom must assess how long it is willing to keep production at a minimum since 2011, what kind of help it may require from other OPEC+ members, and where the line is after which the strategy to “dry up” the market should be reconsidered.

After all, in the summer it seemed that China was about to fully recover from Covid restrictions and that rising demand in Asia would offset stagnant consumption in developed countries. But the Chinese economy is not yet recovering at the pace expected of it, while Western economies may only be beginning to fully experience the stress of rising key rates.

Saudi Arabia is unlikely to be prepared alone, or even with the help of Russia alone, to support prices for the next year or more without trying to more fairly distribute the costs to other OPEC+ members. On the other hand, excessive pressure threatens to ruin the deal and cause prices to fall.

This is why traders are watching the current disputes over oil quotas among African OPEC members so closely, trying to discern cracks in the cartel’s officially monolithic public position.

Russia has taken on the role of a key ally of Saudi Arabia, which, in my opinion, is absolutely correct. Russian oil will remain vulnerable due to sanctions for a long time. Therefore, it is more profitable for oil companies, and especially for the budget, to maintain a deficit in the market and reduce discounts on oil sales, even if this means some reduction in production. The Russian oil industry needs time to transform export logistics, and it would be completely inappropriate to find itself in a situation of a price war.