OPEC and its Russian allies, on Monday agreed to reduce global crude oil output by 100,000 b/d in October, in what the Saudi-led cartel said was a proactive move to stabilize the market.

At the monthly ministerial meeting, the cartel noted the “adverse impact of volatility and the decline in liquidity on the current oil market and the need to support the market’s stability and its efficient functioning.”

The cartel  already is producing about 3 million b/d less than its stated quota. However, prices worldwide have dipped sharply over the past three months, and global economic woes linger. 

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Saudi Energy Minister Prince Abdulaziz bin Salman said the decision was “an expression of will that we will use all of the tools in our kit,”according to media reports. “The simple tweak shows that we will be attentive, preemptive and proactive in terms of supporting the stability and the efficient functioning of the market to the benefit of market participants and the industry.”

‘Symbolic’ Reduction?

Analysts with Tudor, Pickering, Holt & Co. (TPH) said the latest OPEC-plus meeting “was the first in some time to offer some reason to tune in,” with “quotas reverting back to August levels across the group. 

“The largely symbolic cut, given historic underperformance relative to quotas for the group…stemmed the recent move lower for crude oil prices on the back of demand concerns…” 

The TPH team said the lower dip in prices has followed “weakness and lockdown extensions in China, which for our part, we’d underwritten recovering toward more normalized levels coming out of the second quarter in our modeled balances.”
The cartel’s decision to reduce output may be seen mostly as “a bid to support price, with most markets’ structures still firmly in backwardation” ahead of the decision,” TPH analysts said. 

BofA Global Research analyst Francisco Blanch said “there are strong political, economic, strategic and financial arguments to avoid implementing a production cut. With global energy prices at exceptionally high levels due to the unfolding European gas and power crisis, a move by OPEC-plus now to curb crude volumes could spook Washington, Brussels and even Beijing.

“In addition, OPEC-plus government coffers are broadly in very good shape after Brent averaged $104/bbl so far this year.”

Upstream capital spending also has recovered from the 2020-2021 levels, Blanch noted, “with some OPEC-pluc members leading the charge and presumably wanting to grow market share into 2030, another reason to hold off on a cut for now. Still, the main arguments against a production cut are economic. There is simply too much uncertainty around fundamentals going into the winter.”

The Biden administration had been calling for OPEC to increase oil output in a bid to reduce prices as the pump. The White House, in reaction to the cuts, said President Biden “has been clear that energy supply should meet demand to support economic growth and lower prices for American consumers and consumers around the world.” 

The president “is determined to continue to take every step necessary to shore up energy supplies and lower energy prices,” which include releasing emergency oil supplies from the U.S. Strategic Petroleum Reserve.

Political Machinations

In addition to economic concerns, the OPEC cut may signal a political move. Russia has weaponized natural gas supply following its invasion of Ukraine, sending prices soaring. However, the Group of Seven (G7) is looking to change that dynamic for oil prices. 

Last Friday (Sept. 2) the G7 said it would seek to set a price cap on Russian oil in December, basically forming a buyers alliance. BMO Capital Markets analyst Randy Ollenberger questioned whether an oil price cap would damage Russia in funding the war. Sanctions implemented on Russia to date “have proved to be ineffective, and Russia has maintained crude oil and product exports at higher levels than anticipated, which has translated to record cash inflows,” he said. “As usual the ‘devil will be in the details’ and it is not clear how successful this approach will be given Russia’s growing sales to Asia.”

Goldman Sachs analysts said if the price cap were “fully and successfully implemented,” it “would allow Russian oil to flow while simultaneously achieving Europe’s aims of limiting Russian oil export revenues.” The price cap would be in addition to the European embargo rather than substituting for the ban, analysts noted.

The key risk to this policy, however, is the potential for Russian retaliation, which

would turn this into an additional bullish shock for the oil market,” the Goldman team said.

“Consistent with actions taken in the natural gas market, Russia could opt to retaliate, cutting G7 buyers off and shutting in production, thereby elevating global prices and its own revenues even assuming higher logistical costs to nonparticipating countries.”
As a result, Goldman analysts said they are holding a bullish call on oil prices. Their forecast is an average oil price of $125/bbl Brent in 2023. “More importantly, the potential loss of Russian exports in retaliation creates substantial upside risk to our bullish forecast.”