As the leaders of the OPEC Plus energy cartel, Saudi Arabia and Russia agreed on Wednesday to their first significant production cut in more than two years in an effort to raise prices and counter the efforts of the United States and Europe to stifle Moscow’s enormous revenue from the sale of crude. (OPEC to raise price)
European leaders and President Biden have called for more oil production to reduce the cost of gasoline and punish Moscow for its aggression in Ukraine. The implications of the decision cannot be overstated. The Russian president, Vladimir V. Putin, has been accused of using energy as a weapon against countries that oppose its invasion of Ukraine.
The White House was dissatisfied. According to a statement released by Brian Deese, the director of the National Economic Council, and Jake Sullivan, the national security adviser, “The president is disappointed by the shortsighted decision by OPEC Plus to cut production quotas while the global economy is dealing with the continued negative impact of Putin’s invasion of Ukraine.”
About 2% of the world’s oil production is affected by the reduction of two million barrels per day.
According to analysts, OPEC Plus was also hoping to demonstrate to energy markets its unity during the Ukraine conflict and its willingness to act quickly to protect prices by reducing output.(OPEC to raise price)
Prince Abdulaziz bin Salman, the Saudi energy minister, stated at a news conference following the meeting that OPEC Plus was acting in light of indications of a global economic slowdown, which could result in lower oil demand and prices.
He stated, “We would rather be pre-emptive than sorry.”
It appeared that the move had the desired effect: After the meeting, the international benchmark price of Brent crude, which had fallen during the summer, increased by more than 1.5%, extending gains from the previous day and bringing prices back to mid-September levels. In line with the price of oil, the average price of gasoline in the United States has recently resumed its upward trend.
Biden administration officials stated that the president would direct the Energy Department to release 10 million additional barrels of oil from the Strategic Petroleum Reserve in November in response to the OPEC Plus announcement. The administration stated earlier this week that it did not intend to extend the six-month effort to release one million barrels of oil per day, which was supposed to end at the end of this month.
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In coordination with the Group of Seven and other nations, the European Union moved forward with an ambitious plan to limit the price of Russian oil that was pushed forward by the Biden administration hours before the OPEC Plus meeting.
The goal of the cap imposed by the European Union is to maintain a price for Russian oil above the cost of production while maintaining a price that is lower than the current level. The program could, according to estimates from the Treasury Department of the United States, cost the Kremlin tens of billions of dollars annually. However, some analysts contend that the cap would make oil trade logistics more difficult, raising prices. Additionally, it is dependent on the participation of nations outside of the European Union that continue to purchase oil from Russia.
The foreign ministry has criticized the idea in China, one of the largest consumers of Russian oil this year, stating last month that oil is too crucial to the global economy to be subject to the planned price controls.
On September 5, a spokeswoman for the foreign ministry named Mao Ning stated, “Oil is a global commodity — ensuring global energy supply security is vitally important.”(OPEC to raise price)
Additionally, the European Union’s proposal to lower prices appears to compete with OPEC Plus’s effort to raise oil prices.
However, the extent of the reduction in oil production is unknown.The majority of OPEC Plus members regularly miss their production quotas due to a lack of investment, so they won’t need to cut production much, if at all.The actual reduction, according to Richard Bronze, head of geopolitics at Energy Aspects, will only be about one million barrels per day.
Additionally, the Russian and Saudi-led effort to raise prices may be undermined by the weakening global economy. Oil demand would decrease as economic expansion slows.
The fact that the meeting on Wednesday took place in person for the first time since March 2020 at the Organization of Petroleum Exporting Countries’ Vienna headquarters demonstrates the significance of the announcement. Alexander Novak, Russia’s deputy prime minister, was present. Novak has been instrumental in fostering cooperation with other major oil-producing nations.
When European citizens face what could be a difficult winter as a result of higher energy prices linked to Russia’s war in Ukraine, the presence of Mr. Novak, who is subject to sanctions from the United States, may come as a source of embarrassment to officials.
The 23-member group’s approach has fundamentally changed as a result of the production cut by OPEC Plus. The group gradually restored production over the next two years after experiencing a significant reduction in output in the early stages of the pandemic. However, Prince Abdulaziz, who co-chairs OPEC Plus with Mr. Novak, started to change the group’s direction recently as prices fell.
Last month, the gathering flagged worries about the business sectors with an ostensible cut of 100,000 barrels per day. Saudi Arabia appears to have decided that a much bolder signal was required when markets ignored that move and oil prices fell below $80 a barrel for West Texas Intermediate, the American benchmark.(OPEC to raise price)
According to analysts, OPEC Plus may be taking more aggressive actions as a result of Washington and the European Union’s growing market intervention, such as their decision to set a price cap on Russian oil. Russia wants a higher price to compensate for the substantial discounts it has had to offer in order to sell its oil.
Mr. Bronze stated that the price cap “might be an attempt to drive down prices more generally” for some oil producers. He added that OPEC Plus “is willing to take such a big step and one that will be so unpopular in Washington” may be the result of these concerns.
Prince Abdulaziz portrayed OPEC Plus as a “band of brothers” focused solely on preserving market stability at the news conference, denying any involvement with Russia. At one point, he told an assistant to show a chart showing that the price of crude oil has only gone up by a single digit percentage since January, before Russia invaded Ukraine, while the price of other energy sources has gone up, like coal and natural gas in Europe.
Additionally, the group agreed to extend the agreement that established OPEC Plus—a partnership between OPEC, Russia, and its allies—for a year. In December, the alliance, which began in 2016, was supposed to end.
The Kremlin may be using Saudi Arabia, the de facto leader of OPEC, to push for higher oil prices. Saudi Arabia’s leaders want future energy cooperation from Moscow, making it more expensive for the West to take action against Russia.
S&P Global Commodity Insights executive director Bhushan Bahree stated, “To the extent that prices rise, it will make it that much more difficult for Europe to proceed with its sanctions on Russian oil in December.”