The Opec+ oil alliance is planning a significant production cut to shore up falling prices as the group prepares to meet in person for the first time since March 2020, according to people close to the discussions.
The Saudi Arabia-Russia-led oil major is expected to discuss a production cut of more than 1 million barrels a day at Wednesday’s meeting. This is by far the largest since the pandemic began and represents more than 1 percent of global shipments.
The move threatens to send oil prices skyrocketing at a time when much of the world is struggling to bring down energy costs and could create a possible rift with the US, where President Joe Biden has attempted to push fuel prices for motorists ahead the next major midterm elections lower month.
However, two people briefed on Saudi Arabia’s deliberations say Saudi Arabia is keen to cut production to support prices and keep some production capacity in reserve. The kingdom fears Russian production could fall sharply later this year if Western sanctions on its oil exports tighten.
Russia is also said to be backing a cut as it has seen its oil revenues fall in recent months as buyers forced big discounts on its oil sales following its all-out invasion of Ukraine. The ruble’s recent strength is also reducing the amount it receives in its local currency for oil deals, which are primarily priced in dollars.
Opec+ announced this weekend that it would be moving the monthly meeting it has held since the pandemic began from an online event to a full-fledged gathering at the group’s headquarters in Vienna, adding to the feeling that a major policy shift is on the cards should be discussed.
People close to the talks said the cuts could total between 500,000 b/d and 1 million b/d for the group, but Saudi Arabia could also make another unilateral production cut.
Energy Aspects’ Amrita Sen said the group was particularly concerned about the risk of a global slowdown and the impact on consumption growth in emerging markets, and was considering “big cuts to forestall possible demand reactions.”
After cutting production in April 2020 as oil demand slumped during the pandemic, the group has spent most of the past two years continually bringing casks back onto the market.
Biden made a controversial visit to Saudi Arabia in July, where, among other things, he discussed oil production with Crown Prince Mohammed bin Salman – the kingdom’s daily ruler.
Biden had previously criticized MBS, as he is commonly known, for its alleged links to the murder of journalist Jamal Khashoggi.
But after accelerating production ramp-ups over the summer, Saudi Arabia signaled a change of course last month, prompting the Opec+ group to make a small cut in oil production targets by about 100,000 barrels a day as oil prices fell.
Brent crude, the international benchmark, has fallen to around $85 a barrel from around $120 a barrel in early June.
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-standing ties with the US, but Riyadh has been eager to assume a more independent role.
Saudi Arabia and Russia are the second and third largest oil producers in the world after the US, but they rely much more on energy revenues for government spending than the world’s largest economy.
The US is keen to target Russia’s oil revenues to rid Moscow of funding Ukraine’s invasion, but is also concerned about how high oil prices could soar if too much supply is lost from the market.
Washington has urged the G7 to introduce a so-called price cap on Russian oil sales to keep the Kremlin’s kegs in the market while reducing the revenue they receive.
EU sanctions are set to be stepped up in December, including insurance bans on ships transporting Russian oil, which the US and UK are also expected to waive if a price cap can be agreed.
Saudi Arabia’s Energy Minister Prince Abdulaziz bin Salman, the first king to hold the role and MBS’s half-brother, has frequently warned that the group has limited spare production capacity to fill any gaps.
He has also indicated that he believes oil traders are underestimating the risks to the market and has pointed to increased “volatility” and gaps between the financial and physical oil markets.
Additional reporting by Derek Brower in New York and Tom Wilson in London