The full OPEC+ group has agreed to cut production by 2 million bpd, according to sources, after the JMMC recommended a 2 million bpd cut early today.
The OPEC+ group met in Vienna on Wednesday to discuss oil output cuts for November. Leading up to the meeting, different sources cited different figures that the group would be willing to cut. But the key to understanding how this will affect oil prices is not just the overall cut, but the distribution and timing of those cuts, and from what baseline those cuts will be made.
For October—and also in August—the OPEC 10 production target was 26.689 million bpd, with the non-OPEC members of OPEC+ had a collective target of 17.165 million bpd. But the group as a whole has failed to meet those targets. The actual realized production cut will be smaller than the 2 million bpd quota cut, but estimates are that Saudi Arabia’s output alone—which is currently meeting its production targets—would be cut by more than 500,000 bpd if the 2 million bpd cuts are distributed pro rata.
OPEC sources suggested shortly after the meeting concluded that the 2 million bpd would be cut from “current baselines”, with no adjustments made today to the individual country baselines.
The specter of OPEC+ even considering such a large cut as global oil supplies are tight has sent the Biden Administration reeling. White House spokesman John Kirby on Wednesday said that the United States needed to be less dependent on OPEC+ and other foreign producers of oil. The White House was reportedly in a panic leading up to the meeting, trying to prevent OPEC+ from taking such a “hostile act”. In the runup to the meeting, the White House unleashed Amos Hochstein, Janet Yellen, and Brett McGurk to plead its case with the Gulf Nations. Evidence suggests the move had zero effect.
Brent crude prices began to slip on the news but were still 0.29% higher on the day, with WTI trading flat.
By Julianne Geiger for Oilprice.com
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However, the geopolitical impact is extremely important since the cut was made despite dogged attempts by the Biden administration to dissuade OPEC+ not to take this decision. Moreover, it came at a time when crude oil prices could be headed towards a steeper upward trajectory as a result of the EU ambassadors agreeing to cap the price of Russian crude oil with the possibility that Russia could halt oil exports to any country implementing the cap.
Moreover, it exposes the United States’ impotence in offsetting the OPEC+ cut with increased supplies of its own. US shale oil is a spent force. It neither can raise production to fill any gap resulting from the OPEC+ cut nor would the United States release more oil from its strategic petroleum reserve (SPR). The SPR, currently at 427 million barrels, is at its lowest since 1984. Furthermore, the US Department of Energy (DoE) will find it virtually impossible to replace previous SPR releases because of the tightness of the market.
Dr Mamdouh G Salameh
International Oil Economist
Global Energy Expert