OPEC+ has dried up its sleeves

The OPEC+ alliance, which includes the largest oil producers Saudi Arabia and Russia, against the backdrop of an impending recession in the global economy, decided to cut production quotas by 2 million barrels per day at once. As a result, the quotas of Saudi Arabia and Russia will decrease by 500 thousand barrels per day. For Russia, this is not significant, since the country already produces much less than its quota, and after the introduction of EU sanctions in December, production may fall even more. Experts expect that thanks to the OPEC + decision, oil prices will be kept at $90 per barrel.

OPEC+ meeting in Vienna accepted decision to reduce production quotas by 2 million barrels per day (b/d) in November. Thus, the largest oil producers have chosen the toughest of the deal options discussed. The decision was announced at the first face-to-face meeting of ministers of the cartel member countries since 2020, as negotiations were conducted online during the pandemic.

Also, OPEC + members decided to extend coordination in the oil market until the end of 2023 – the previous deal formally expired at the end of the year. Now ministerial meetings will be held not every month, but every two months, but an extraordinary meeting can be held at any time.

Thus, the OPEC+ production cycle, which began in the summer of 2020 and continued until September 2022, has officially ended.

Although formally the level of production quotas in October corresponded to the base level of quotas set at the very beginning of the deal (in April 2020), in fact, the OPEC+ countries produced 3.5 million b/d less than their quota. In particular, according to the agreement, Russia was supposed to increase oil production (without gas condensate) to 11 million bpd in September, in reality it produced 9.9 million bpd. As a result of the current agreement, Russia’s quota will be reduced to 10.5 million barrels per day, which means that the country still has the opportunity to increase production from the current level. However, it is more likely that production in the Russian Federation will decrease in the coming months against the background of the imposition of an EU embargo on Russian oil from December 5 and the introduction of a price ceiling for it. Deputy Prime Minister Oleksandr Novak, who is in charge of engagement with OPEC+, acknowledged on October 5 that the sanctions could lead to a “temporary decline” in production. According to him, in 2023 the Russian authorities expect a reduction in production (with condensate) to 490 million tons compared to 530 million tons this year.

It is assumed that the decision of OPEC + can reverse the downward trend in oil prices: the price of Brent oil in September fell by 20% to $82 per barrel, the last time it cost that much in January of this year. On the decision of OPEC + to reduce quotas on October 5, the price of Brent exceeded $92 per barrel.

OPEC+ moves are hurting efforts by the Democratic administration in the US to contain domestic gasoline prices amid the midterm congressional elections coming up in November. White House October 5 issued a statement, in which he called the OPEC+ decision “myopic” and also announced the administration’s intention to “consult with Congress on additional tools and powers to weaken OPEC’s control over energy prices.” In addition, according to Bloomberg, the White House is considering a possible embargo on the export of petroleum products from the country.

The real decline in production can be no more than 60% of the reduction in quotas, since a number of countries already produce less than the declared volumes, Igor Galaktionov, an expert on the stock market at BCS Mir Investments, believes. In his opinion, since the beginning of the week, the market has already included the expected reduction in quotas in Brent quotes, so the reaction of oil prices to the OPEC + decision itself may be restrained. After a short rise, a correction is not ruled out, since speculators who bought earlier can take profits, the expert believes: in the future, a smooth rise in quotations is not ruled out, since market confidence in OPEC + support, combined with the risk of falling supplies from Russia, may outweigh fears due to a recession.

Russia is still producing about 1.3 million b/d less oil (excluding condensate) than allowed under the OPEC+ quota, continues Ronald Smith, Senior Analyst at BCS Mir Investments. He notes that only Saudi Arabia, Iraq and the United Arab Emirates will have to actually cut production in the event of a reduction in quotas, but this will still become a support factor for oil prices.

Free oil production capacity in the world is now at historically low levels, Sergey Kondratiev from the Institute of Energy and Finance explains the OPEC + decision, recalling that many OPEC + members have a budget balanced at a price above $100 per barrel. According to him, the actual production of OPEC + as a result of the announced decision may decrease by 1.1-1.3 million b/d.

Dmitry Kozlov