The OPEC+ oil alliance is planning a substantial production cut to support falling prices, according to people familiar with the talks, as the group prepares to meet in person for the first time since March 2020.
The oil group, which is led by Saudi Arabia and Russia, is expected to discuss a production cut that could total more than a million barrels a day at Wednesday’s meeting. This is by far the largest since the start of the pandemic and is equivalent to more than 1% of global supplies.
The move threatens to drive up oil prices at a time when much of the world is battling to lower energy costs and could create a potential rift with the United States, where President Joe Biden has tried to to lower fuel prices for motorists ahead of the crucial midterm elections. month.
Two people with knowledge of Saudi Arabia’s thinking, however, say Saudi Arabia wants to cut production both to support prices and to be able to keep some production capacity in reserve. The kingdom fears that Russian production could fall sharply later this year when Western sanctions against its oil exports tighten.
Russia would also be in favor of a cut as it has seen its oil revenues fall in recent months as buyers imposed deep discounts on its oil sales following its large-scale invasion of Ukraine. The ruble’s recent strength is also reducing the amount it receives in its home currency for sales of mostly dollar-denominated oil contracts.
International oil benchmark Brent rose 3% after news that the producer group was considering cutting supply, to $87.67 a barrel. The contract remains well below the high above $130/bbl reached earlier this year following the invasion.
OPEC+ announced this weekend that it would move the monthly meeting it has held since the start of the pandemic from an online meeting to a full-fledged gathering at the group’s headquarters in Vienna, adding to the impression that a substantial policy change needs to be discussed.
People close to the talks said the cuts could total 500,000 bpd to 1 million bpd for the whole group, but Saudi Arabia could make another unilateral production cut.
Amrita Sen of Energy Aspects said the group was particularly concerned about the risk of a global slowdown and the effect on consumption growth in emerging markets and was therefore “considering significant cuts to anticipate any possible reaction from the request”.
After cutting production in April 2020 as oil demand slumped during the pandemic, the group has spent most of the past two years steadily adding barrels back to the market.
Biden made a controversial visit to Saudi Arabia in July where oil production was discussed, among other issues, with Crown Prince Mohammed bin Salman, the kingdom’s daily ruler.
Biden previously criticized Prince Mohammed for his alleged links to the murder of journalist Jamal Khashoggi.
But after accelerating production increases this summer following US pressure, last month Saudi Arabia signaled a change of course, leading the OPEC+ group to slightly cut production targets by around 100,000 bpd. oil as oil prices fell.
The possibility of deeper cuts has already drawn criticism from senior Democratic officials in the United States. Ro Khanna, chairman of the House of Representatives subcommittee on the environment, wrote on Twitter that the United States should “make it clear to the Saudis that we will cut off their supply of aviation parts . . . if they reduce oil production to bolster Putin and thereby defraud the Americans.”
Saudi Arabia’s oil alliance with Russia, which brought Moscow into the expanded Opec group in 2016, has at times been at odds with its long-term ties to the United States, but Riyadh has been keen to carve out a more independent role.
Saudi Arabia and Russia are the world’s second and third largest oil producers after the United States, but are much more dependent on energy revenues for government spending than the world’s largest economy.
The United States is keen to target Russia’s oil revenues as a way to starve Moscow of funding for Ukraine’s invasion, but is also concerned about how oil prices could skyrocket if too much supply is lost in the market.
Washington has pushed the G7 to put in place a so-called price cap on Russian oil sales to keep Kremlin barrels on the market while reducing the revenue they receive.
In December, EU sanctions are expected to tighten, including bans on insurance on any vessel carrying Russian oil, which the US and UK should also adopt if a price cap can be agreed.
But Kevin Book, managing director of ClearView Energy Partners in Washington, said the move by Saudi Arabia and other producers to restrict supply could be a reaction to the administration’s discussions of a price cap.
“This is the part where diplomats talking about regulatory price caps come up against producers talking about physical supply cuts,” Book said.
Saudi Energy Minister Prince Abdulaziz bin Salman, Prince Mohammed’s half-brother, has frequently warned that the group has limited spare production capacity to make up any shortfalls.
He also said he thought oil traders were underestimating the risks to the market and pointed to increased “volatility” and gaps between financial and physical oil markets.
Additional reporting by Tom Wilson in London