Oil prices rose by almost $4 per barrel on Monday with news that OPEC+, the expanded Organization of Petroleum Exporting Countries that includes Russia, could announce its largest production cut in years during its meeting this week.
OPEC+ delegates on Monday hinted that oil production could be reduced by over a million barrels per day, a larger cut than any seen since the height of the coronavirus pandemic in 2020.
The primary reason for the potential production cut is reduced demand from China, which continues to lock down its cities due to coronavirus outbreaks. Oil dropped from $120 per barrel to less than $90 over the past four months due to China’s reduced demand and recession fears in other countries.
OPEC+ reduced production by 100,000 barrels per day last month. Some analysts told Reuters on Monday that a comparable reduction might be in the works this week, but there are reasons to doubt that best-case scenario:
“After a year of tolerating extremely high prices, missed targets and severely tight markets, the (OPEC+) alliance seemingly has no hesitation when it comes to acting rapidly to support prices amid a deterioration in the economic outlook,” Oanda market analyst Craig Erlam said.
OPEC+ missed its production targets by nearly 3 million bpd in July, two sources from the producer group said, as sanctions on some members and low investment by others stymied its ability to raise output.
CNBC noted OPEC very suddenly changed this week’s meeting from a planned virtual conference, similar to those held ever since the coronavirus pandemic began, to an in-person meeting at the organization’s headquarters in Vienna, Austria.
“This big shift is creating big expectations around what may happen, with talk of the biggest output cut since Covid hit. By ‘asking’ the world’s energy journalists to hop on a plane at short notice, it seems clear something is afoot. OPEC likely wants the media there for a reason,” CNBC noted.
Another hint of turbulence is that Russian Deputy Prime Minister Alexander Novak is expected to attend the meeting, making him the highest-ranking Russian official to visit Europe since the invasion of Ukraine began. CNBC said the White House “is not happy with this meeting, or its expected outcome.”
Also unhappy is OPEC leader Saudi Arabia, which is reportedly angry at the Biden administration for using massive (and extremely dangerous) releases of oil from the U.S. Strategic Petroleum Reserve to keep American pump prices down, and President Joe Biden’s sagging poll numbers up. Democrats are already fuming at the Saudis for potentially blowing U.S. gas prices into the stratosphere, just in time for the November midterm elections.
“This is beyond the pale. They are actively fleecing the American people and destabilizing the economy. That’s just outrageous. Who do they think they are?” complained Rep. Ro Khanna (D-CA) in a CNN interview on Monday.
“It’s outrageous. The Saudis need to be dealt with harshly. They are a third-rate power. We are the most powerful country in the world. I don’t know why we kowtow to them,” Khanna raged, advising President Biden to retaliate by cutting off Saudi Arabia’s supply of U.S. aviation parts and military supplies.
“They are not our allies. They are hurting the American people. And we need to be tough with them. The president needs to make it clear we will cut off their supply. We could ground their air force in a day,” Khanna threatened.
President Biden made an embarrassing trip to Saudi Arabia in July, walking back his campaign promises to turn the kingdom into a “pariah state” in order to beg them to pump more oil. Biden’s awkward fist-bump greeting with Crown Prince Mohammed bin Salman (MBS) became the enduring image of a failed diplomatic effort that ended with the Saudis not only dismissing Biden’s pleas for more oil production, but accusing him of lying about his conversations with MBS. Only a few months later, it appears the Saudis are poised to implement the biggest production cut of the post-pandemic era.