The member states of the Organization of Petroleum Exporting Countries (OPEC) and their allies (which together form OPEC+) decided on Wednesday, August 3, to slow down the rate of increase in production. The representatives of the thirteen members of the organization and its ten partners are thus resisting calls by US President Joe Biden to further open the oil floodgates in an attempt to curb rising prices.
OPEC, led by Saudi Arabia, and its allies led by Moscow, have agreed to an almost ridiculous production increase for the month of September: namely “100,000 barrels per day”compared with an additional 432,000 and then 648,000 barrels set for previous months, the alliance announced in a press release after their meeting, which was held in Vienna.
Prices went up immediately “something to disappoint the American president”, reacted to Agence France-Presse Tamas Varga, from PVM Oil Associates. Oanda’s Edward Moya joked about “the smallest increase in the history of OPEC+, which will not help overcome the current energy crisis”. “The Biden administration will not be thrilled”estimated, predicted “a setback in relations between the United States and Saudi Arabia”. Others, like Stephen Brennock of PVM Oil Associates, saw it “a symbolic measure to appease” Joe Biden.
Low reserve capacities
The twenty-three members of OPEC+ had to decide on a new strategy, as their current agreement comes to an end. They have returned to pre-pandemic production levels. In the spring of 2020, the group had chosen to leave millions of barrels of oil underground, so as not to flood the market with crude that it could not absorb due to a collapse in demand.
Hoping to influence the decision, Joe Biden first visited Saudi Arabia as US president in mid-July and stayed away from their one-state talk. “pariah” following the murder of dissident journalist Jamal Khashoggi. His goal was to convince the kingdom to pump more to curb rising fuel prices.
With its decision, OPEC+ shows that it stands united and forgives Russia, whose interests are diametrically opposed to those of Washington. In the press release, she insists on “the importance of maintaining the essential consensus for the cohesion of the alliance”.
Last week, French President Emmanuel Macron was also in on the act by hosting Saudi Crown Prince Mohammed Ben Salman. At the end of a meeting denounced by human rights defenders, the two leaders said they wanted “intensify cooperation” for “mitigating the effects in Europe, the Middle East and the world” of the war in Ukraine.
Beyond geopolitical issues, the recent relative drop in oil prices, against a backdrop of recession fears, may have led OPEC+ to play it safe. From their highs last March to levels not seen since the 2008 financial crisis, the two benchmark crudes, Brent and WTI, have lost more than 26%. The cartel is also taking advantage of the current situation. Saudi Arabia posted strong growth in the second quarter of 2022, fueled by black gold.
With the exception of Saudi Arabia and the United Arab Emirates, the various members also have low reserve capacities. In fact, OPEC+ is struggling to respect the quotas shown, due to protracted political crises or even a lack of infrastructure investment and maintenance during the pandemic. Russian production is also reduced, under the yoke of Western sanctions in connection with the invasion of Ukraine.
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