The leader of the non-OPEC oil producers in the OPEC+ alliance, Russia, is the biggest beneficiary of the 2 million barrels per day (bpd) cut announced this week, as Russia will not cut any output while the price of oil is set to rise in the coming months, analysts say. Earlier this week, OPEC+ announced the biggest cut to its collective target since 2020. Despite the “monster” headline number of 2 million bpd, as some analysts have described it, the actual cut from current OPEC+ oil production would be half that figure, at around 1 million bpd-1.1 million bpd. That’s because many producers haven’t been able to produce to their quotas for months. Most recently, Russia has joined the group of laggards in production – led by African OPEC producers Nigeria and Angola – as Western sanctions have led to lower Russian oil output.
Russia is estimated to have been around 1 million bpd below its 11-million-bpd quota for September, so it will not have to reduce any production and will only benefit from higher oil prices.
The effective OPEC+ cut as of November will be mostly shouldered by Saudi Arabia, which has been trying to produce to quota. The Saudis are set to reduce 526,000 bpd of output and will have a target of 10.478 million bpd. Russia has the same target, but it is already around 500,000 bpd below it.
Despite OPEC+’s insistence that the decision to cut production was a “technical” one and based on signs of slowing economies and the risk of recessions, analysts see the move as a political one. They also see oil prices returning to the $100 per barrel mark sooner than previously thought, expecting the oil market to be in a deficit for the whole of 2023. And they also see Russia as a winner of the OPEC+ decision because oil prices will rise while Russia’s production will fall, and Russia will not have to cut even a barrel of its production, provided that it will have a big enough remaining market after December to sell the crude now going to Europe.
Russia is the winner of the OPEC+ cut, as it sees falling production, rising discounts for its oil, and a loss of gas revenues, Ole Hansen, Head of Commodity Strategy at Saxo Bank, said. The global consumer is the loser, while the risks include an even more aggressive rate hike policy from the Fed, a strong U.S. dollar, and lower economic growth for longer, Hansen added.
Oil prices will move higher from current levels through year-end and next year, analysts said after the OPEC+ meeting.
Morgan Stanley said oil prices would rise again to $100 per barrel faster than previously estimated, and lifted its price forecast for the first quarter of 2023 to $100 from $95 per barrel. Goldman Sachs raised its Brent Crude forecast for this quarter by $10 to $110 per barrel.
Russia, for its part, reiterated – via Deputy Prime Minister Alexander Novak, who represents the country at OPEC+ meetings – that it would not supply oil to countries that would join the price cap.
“We are against such nonmarket instruments; such precedents are very harmful for the energy market. This leads only to a deficit, to a price hike; consumers will pay for that, if they want to introduce such a mechanism,” Novak said as quoted by Russian news agency TASS. Novak also said that Russian oil and condensate production would drop next year.
Despite insistence from Russia and all of OPEC+ that the production cut is based on technical market assessments and is aimed at “stability,” many analysts, as well as the White House, see the move as a political one.
“This is hugely political and a very clear signal of Opec’s discontent regarding the price cap,” Amrita Sen, chief oil analyst at Energy Aspects, told the Financial Times. “Regardless of whether the price cap is actually effective, they see this as a dangerous precedent,” Sen added.
The White House didn’t spare adjectives to describe the OPEC+ cut as a “shortsighted” and “misguided” “mistake.”
“What we think is that this decision by OPEC+ is one purported self-interest — is a mistake and it’s misguided,” White House Press Secretary Karine Jean-Pierre said, adding that “it’s clear that OPEC+ is aligning with Russia with today’s announcement.”
National Security Advisor Jake Sullivan and National Economic Council (NEC) Director Brian Deese said in a statement, “In light of today’s action, the Biden Administration will also consult with Congress on additional tools and authorities to reduce OPEC’s control over energy prices.”
By Tsvetana Paraskova for Oilprice.com
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