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As MRP noted last week, it was expected that the 24 countries of the OPEC+ syndicate would decide to make significant cuts to their collective output at the October 5 summit, especially since this was the first in-person gathering of officials from member states in over two and a half years. Most estimates for OPEC+’s production cuts ranged from 500,000 to 1 million barrels per day (bpd), but OPEC+ shocked nearly everyone with a 2 million bpd reduction in their target level of production. That decline would be equivalent to about 2% of global oil demand.
The move to support higher oil prices was widely viewed as a direct strike at US economic policy goals, particularly the reduction of energy prices and general inflation. The White House itself noted that President Biden was “disappointed by the shortsighted decision by OPEC+ to cut production quotas while the global economy is dealing with the continued negative impact of Putin’s invasion of Ukraine.” White House Press Secretary Karine Jean-Pierre further stated, “it’s clear that OPEC+ is aligning with — with Russia with today’s announcement.”
The Organization of the Petroleum Exporting Countries (OPEC) itself is headed up by Saudi Arabia and the coalition of independent “plus” nations that work in tandem with OPEC, without being full-fledged members, is headed by Russia. There is no doubt that Russia supported steeper cuts and will utilize higher oil prices to fund their ongoing war in Ukraine, but the brunt of the output cuts will mostly be borne by middle eastern producers. Russia’s output adjustment will only represent a little more than a quarter of the entire cut.
President Biden has been pushing for Saudi Arabia and OPEC+ nations to either stem production cuts or even increase output since last year, but to no avail. This latest policy shift toward an aggressive tightening of oil supplies is the most significant defiance shown toward the US since Russia and Saudi Arabia initiated a trilateral oil price war with each other and the US in 2020, just as COVID-19 was coming onto the scene.
In general, the US and other western governments have struggled to effectively bargain with middle eastern nations in recent years and the ongoing energy crisis has not helped matters. As MRP noted last month, German Chancellor Olaf Scholz’s tour of the Arabian Peninsula, which included visits to Saudi Arabia, Qatar, and the United Arab Emirates (UAE), ended with Scholz securing just one single shipment of LNG scheduled for 2023. The trip was supposed to be critical in helping Germany gain reliable suppliers of oil and natural gas, given the EU’s plan to wean itself off of Russian energy, but Bloomberg notes that the Gulf States are playing hard ball in their negotiations with European nations, attempting to leverage the latter’s dire situation to sign long-term contracts at record prices.
In many ways, the nations of the Gulf Cooperation Council (GCC) have managed to find a sweet spot in the heat of rising global tensions; one where they may enjoy all of the economic benefits and avoid any meaningful repercussions.
WTI crude oil closed above $93.00 for the first time since August last Friday, signaling just how much of an impact OPEC+’s plan had on traders’ outlook. It’s important to remember, however, that just because OPEC+ says it will cut 2 million bpd, that doesn’t necessarily mean production will necessarily decline that much from current levels. As Edoardo Campanella, economist at UniCredit Bank in Milan, recently told MarketWatch, “OPEC+ was collectively pumping around 30 million barrels a day [in August]… which is about 3.5 [million bpd] below the official quota (meaning that global supply is almost 4% lower than it should be)”. Essentially, much of the 2 million bpd cut in stated production targets from OPEC+ is already reflected in actual output through August since several OPEC+ members are underproducing.
Though OPEC+’s revisions to output levels may actually be less significant than they sound, global oil markets are still in a precarious situation – particularly in the US.
Thus far, the US’s total oil production has yet to recover from the COVID crash, which pushed more than 100 North American oil and gas firms, including forty-six exploration and production (E&P) companies and 61 oil-field service companies, into Chapter 11 bankruptcy in 2020. Energy Information Administration (EIA) data shows monthly US field production of crude oil peaked in November 2019 at 13 million bpd. August’s monthly output was 11.8 million bpd, roughly 9.2% below the all-time high. The supply of refined and finished products remains an issue as well with gasoline stockpiled tracked by the EIA falling to their lowest level in 8 years.
Because oil companies have been hesitant to invest as heavily as they previously did in US production, the Biden administration has mostly tried to head off the increasing price of oil by releasing up to 1 million barrels of oil per day from the US’s strategic petroleum reserve (SPR) since April. Though that program was set to end this month, it is likely that the administration extends SPR disbursements to tamp down on oil and gasoline prices.
However, it is worth noting that the intensity of the current program is becoming increasingly untenable. The SPR is already at its thinnest level since 1984, diminishing the US’s ability to respond to a crisis even worse than what it is dealing with now. Of the 416 million barrels of oil still in the SPR, as of October 5, Bloomberg’s Javier Blas notes that 266 million are considered “presold” due to eight federal laws mandating the sale of up to 359 million barrels from the SPR until 2031. According to Blas’s math, if the US had 380 million barrels left in the reserve by the end of 2022, just 144 million barrels would be available for emergency release going forward. |
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