Quotas were taken from the ceiling – Newspaper Kommersant No. 163 (7364) dated 09/06/2022

The largest oil producing countries for the first time since May 2020 reduced their production quota for October. Despite the rather high prices, the participants in the OPEC + deal saw threats in the slowdown in economic growth in the world. Since the current OPEC + quota already significantly exceeds the cartel’s real production, the decision to reduce the quota looks symbolic. Nevertheless, analysts say, it demonstrates the determination of OPEC + to protect the current level of oil prices, including against the backdrop of G7 plans to impose a price ceiling on Russian oil exports.

OPEC+ countries on September 5 for the first time since May 2020 decided to cut production quotas – in October they will decrease by 100 thousand barrels (b / d) per day. Thus, the parties to the transaction returned to the level of production agreed upon for August. Deputy Prime Minister of the Russian Federation Alexander Novak linked the decision of OPEC + with a slowdown in the global economy. The next meeting of the parties to the agreement is scheduled for October 5.

On the news of the OPEC+ decision, November futures for Brent on the London ICE exchange rose by almost 4% to $96.47 per barrel.

It was assumed that the largest oil producers would be able to complete by the fall the OPEC + agreement, which began in May 2020, which assumed a total reduction in production by the participants in the transaction by 9.7 million bpd. Then the quotas gradually increased, but already in the autumn of 2021, the size of quotas and the real opportunities of the OPEC+ countries to increase production began to diverge. The situation worsened in 2022 after the introduction of Western sanctions against Russia, due to which production in the country fell and has not yet recovered to the level of February. All this together led to the fact that already in July, OPEC + production lagged behind the level of quotas by 2.9 million bpd. Only Sadovskaya Arabia and the United Arab Emirates have free capacity to increase production, and, accordingly, in practice, the change in quotas applies only to the production of these two countries. According to Reuters estimates, in OPEC as a whole, free capacity may be 2-2.7 million b / s, which in any case will not cover the gap from the target level.

Formally, in September, the Russian Federation and Saudi Arabia should have increased production up to 11 million bpd. However, as reported by “Kommersant”the Russian Federation, on the contrary, slightly reduced production in August, mainly due to a drop in gas condensate production due to a reduction in gas production from Gazprom.

Under these conditions, the decision of OPEC + to cut quotas does not so much affect the volume of oil supply as it sends a signal to the market about what policy the cartel intends to pursue in the future.

In mid-August, the head of the Saudi Ministry of Energy, Abdulaziz bin Salman, said that the paper oil market had become too volatile, “is in a state of schizophrenia” and pulled away from the physical oil market.

The OPEC+ decision to reduce the quota was taken shortly after the G7 announced their intention introduce a price ceiling on oil exports from Russia. On September 5, Russian presidential spokesman Dmitry Peskov confirmed that the Russian Federation would not supply oil to countries that impose such restrictions. “The statements of individual G7 leaders and the issues under consideration regarding the restoration of marginal prices for the purchase of Russian oil, this also introduces quite large uncertainties for the market,”— declared Deputy Prime Minister Alexander Novak on the air of Rossiya 24.

Against the background of a significant drop in oil prices from the maximum, combined with a possible recession in the global economy, OPEC + chose the path of a symbolic reduction in production in order to send a signal to the market and support prices at the current comfortable level for producers in the region of $100 per barrel, Anton Usov from Kept believes. In his opinion, the current OPEC + decision will not affect production plans in the Russian Federation, since the decrease is symbolic.

Dmitry Kozlov