The relentless drive of OPEC+ to keep driving oil prices higher, as predicted by OilPrice.com some time ago, was seen again in last week’s extension of major additional cuts made to the initial reductions in output first put into place last October. On 3 August, the de facto leader of the OPEC part of the group, Saudi Arabia, announced it will continue the additional 1 million barrel per day (bpd) cut in production that it announced in June through into September at least. Russia, looking to quietly sell its oil at a discount to the OPEC+ rate through backdoor channels, as also analysed by OilPrice.com, said it will taper its 500,000 bpd additional export cut for August to 300,000 bpd in September. These extended cuts come on top of the 3.66 million bpd in collective cuts from the OPEC+ oil cartel implemented since October 2022. The key questions now are: will OPEC+ keep oil prices rising through further production cuts and, if so, what can the West do about it?
The short answer to the first question is ‘yes’, with Saudi Energy Ministry sources quoted last week in the official Saudi press agency as saying that the Kingdom’s oil output could go even lower if needed. The sources added: “This additional voluntary cut comes to reinforce the precautionary efforts made by OPEC+ countries with the aim of supporting the stability and balance of oil markets.” For Saudi Arabia, the only possible reason to stop cutting production to keep prices rising evaporated when it formalised its move away from the U.S. sphere of influence and into that of China and Russia with the resumption of relationship deal agreed with Iran in March, brokered by Beijing, and analysed in depth in my new book on the new global oil market order. For two key reasons examined shortly, the U.S. and its core allies see rising oil and gas prices (historically the price of gas is 70 percent derived from the price of oil) as serious economic and political threats to them, given that they are generally major net importers of energy. For China, another net importer of energy, these threats are diminished as they can buy oil and gas at substantial discounts to the OPEC+ price from Russia and several other OPEC+ members.
Given the removal of the U.S. constraint on moving oil and gas prices ever higher, Saudi Arabia and its OPEC brothers want to push them as high as they can without choking off significant demand from their customers. Ever since the end of the calamitous 2014-2016 Oil Price War started by Saudi Arabia, as also analysed in my new book on the new global oil market order, these countries have needed to keep repairing the damage done to their finances during that period, and the subsequent 2020 Oil Price War. In theory, Saudi Arabia has a fiscal breakeven oil price of US$78 pb of Brent in 2023, which given its mean average US$1-2 pb lifting cost of a barrel oil (the lowest in the world, along with Iran and Iraq) would seem to offer s substantial financial cushion for it. In practice, though, given its spiralling financial commitments to various socio-economic and vanity projects, its fiscal breakeven oil price is a lot higher than that, and constantly rising. The same applies to a greater or lesser to degree to all its OPEC brothers.
For Russia in the broader OPEC+ grouping, the same reason to keep oil and gas prices rising are also in place, but with a twist. Although it has a fiscal breakeven oil price of around US$115 pb of Brent this year, the key consideration for it is how best to work around the various bans and price caps that were introduced on its oil and gas exports following its invasion of Ukraine last year – including the introduction of a general oil price cap on Russian oil at US$60 per barrel. Given this, Russia’s strategy has been very straightforward, but very effective: persuade Saudi Arabia to increase the OPEC group’s oil prices as much as possible while at the same time selling its own oil at a discount to this price, but still above the official oil price cap. And there are plenty of willing buyers for discounted Russian oil whether it is at or above the US$60 pb barrel price cap, including China and India.
For the U.S. and its core allies, ever-increasing oil and gas prices have caused dramatic spikes in inflation and the interest rates required to combat it, which in turn make economic recessions more likely. For the U.S. itself, these fears have very specific ramifications: one economic and one political, as also analysed in my new book on the new global oil market order. The economic one is that historically every US$10 pb change in the price of crude oil results in a 25-30 cent change in the price of a gallon of gasoline. For every 1 cent that the average price per gallon of gasoline rises, more than US$1 billion per year in consumer spending is lost, and the U.S. economy suffers. The political one is that, according to statistics from the U.S.’s National Bureau of Economic Research, since the end of World War I in 2018, the sitting U.S. president has won re-election 11 times out of 11 if the U.S. economy was not in recession within two years of an upcoming election. However, sitting U.S. presidents who went into a re-election campaign with the economy in recession won only one time out of seven. This is not a position sitting President Joe Biden, or the Democratic Party, wants to be in one year out from the next U.S. election.
So, what can the West do about it? Any idea the U.S. had at persuading Saudi Arabia and its OPEC brothers to stop their production cuts was torpedoed when Saudi Crown Prince Mohammed bin Salman and his UAE counterpart Mohammed bin Zayed al Nahyan refused to take a telephone call from President Joe Biden in early March 2022 – at the height of the crisis after the Russian invasion of Ukraine - to discuss them doing that very thing. Meanwhile, the opportunities in the very short-term to dramatically increase production in the U.S.’s shale fields, or the conventional ones, to counterbalance for lost OPEC+ production are extremely limited. Similarly, there is little realistic prospect of major strategic petroleum reserve releases from both the U.S. and International Energy Agency countries being sustained for as long as OPEC+ can keep cutting supplies.
This is one reason why, as exclusively revealed in OilPrice.com, the U.S. has been in discussion with Iran since the end of June to put a new version of the Joint Comprehensive Plan of Action (JCPOA, or colloquially ‘the nuclear deal’) in place within the next three months. An adjunct reason for this is that it would be the beginning of significant U.S. attempts to drive a wedge into the newly formed Saudi Arabia-Iran relationship under China’s influence. The aim is for the new deal to be in place before the onset of the winter months. The new version will be short-term, a senior source who works closely with Iran’s Petroleum Ministry exclusively told OilPrice.com at the end of June. And it will not include the specific conditions relating to the Financial Action Task Force and the Islamic Revolutionary Guards Corps that stymied previous talks on such a deal, as also analysed in my new book on the new global oil market order. The only key stipulations being made by the U.S. in these ongoing negotiations is that Iran pledges to keep its uranium enrichment at or below 60 percent and that it agrees to regular inspections again from independent nuclear watchdogs.
Over and above the geopolitical positives for the U.S. and its allies in this new JCPOA, would be the inflow of big flows of oil and gas from Iran to counteract the reductions from OPEC+. According to a senior analyst at global energy markets intelligence company Kpler, spoken to exclusively by OilPrice.com at the time, Iran could see an 80 percent recovery of full production within six months and a 100 percent recovery within 12 months. “Ultimately, we believe Iranian production could technically jump by 1.7 million bpd including 200,000 bpd of condensate and LPG/ethane, in a 6-to-9-month period from when sanctions are lifted and an immediate impact of a 5-10 percent fall in the oil price would be likely,” the analyst concluded.
By Simon Watkins for Oilprice.com
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