OPEC+ Cuts Oil Production Amid Recession Fears

OPEC+ Cuts Oil Production Amid Recession Fears

OPEC+ countries meet in Vienna to discuss their oil production strategy (AFP/JOE KLAMAR)

The OPEC + countries decided this Monday to reduce their production to support prices in the face of fears of recession, a first in more than a year and the drastic cuts made by the Covid-19 pandemic.

The representatives of the thirteen members of the Organization of Petroleum Exporting Countries (OPEC), led by Saudi Arabia, and its ten allies led by Russia, agreed to “return to the August quotas”, that is, 100,000 barrels less than in September . the Vienna-based alliance said in a statement.

The group, which met by videoconference, leaves the door open for further discussions before the next meeting on October 5, “to respond if necessary to market developments.”

Over the course of its monthly meetings, OPEC+ is resisting calls from Westerners to open its floodgates more widely.

Rising with veiled words against the announced reduction, the United States reacted on Monday by calling for a balance between energy supply and demand.

The American president Joe Biden “is clearly convinced that the supply of energy does correspond to the demand to support the economic croissance and reduce the prices for American consumers and across the world”, according to a communiqué from the Maison White.

“This symbolic fall is not a real surprise after the murmurs of recent weeks,” Caroline Bain, an analyst at Capital Economics, reacted in a note.

The Saudi Minister of Energy, Abdelaziz ben Salman, had seemed to open the door, ten days ago, to the hypothesis of a cut, denouncing a market “fallen into a vicious circle of low liquidity and extreme volatility”.

Hit by a gloomy global economic outlook, prices for the two global crude benchmarks have in recent weeks retreated from their March highs near $140 a barrel.

Around 19:20 GMT, the price of a barrel of Brent from the North Sea fell 0.53%, to 95.23 dollars, and the WTI, a reference for the North American market, gained 2.3%, to the $88.87.

– “Central Petroleum Bank” –

“This decision shows that we are prepared to use all the tools at our disposal,” said the Saudi minister, in an interview with the financial agency Bloomberg. “We will be vigilant and dynamic to support the stability and efficiency of the market.”

The alliance “means that it will act to support prices if they collapse”, for example, in the event that Iranian oil returns, explains Matthew Holland, a geopolitical analyst at the research institute Energy Aspects.

For US President Joe Biden, who visited Saudi Arabia for the first time as US president in mid-July to try to influence Riyadh’s strategy, it is “a blow”, said Craig Erlam, an analyst at the trading platform OANDA.

For him, the “political damage” caused by this controversial visit is “pure waste” with a result “worse” than before this initiative.

“Saudi Arabia and OPEC+ are the +Central Oil Bank+,” jokes Bjarne Schieldrop, an analyst at Swedish bank SEB. “And you better never try to fight them.”

Moscow, a pillar of the group with Riyadh, for its part evoked “many uncertainties” linked in particular to “the declaration of the G7 leaders on the ceiling of the price of Russian oil”, according to the words of the deputy prime minister. in charge of energy issues. Alexander Novak.

– Question of “credibility” –

Another element that is taken into account is the regular inability of OPEC + to cover its quotas.

“Current production and quotas are now disconnected, so it’s a credibility issue,” Schieldrop says. It is estimated at about 3 million barrels per day below the proposed objectives.

In the spring of 2020, the cartel had made radical cutbacks in the face of a collapse in demand caused by the pandemic. A year later, he began to reopen the floodgates, but with great difficulty.

Prolonged political crises or lack of investment and maintenance during the pandemic are now harming oil infrastructure: many countries in the group, such as Angola or Nigeria, cannot pump more.

Only Saudi Arabia and the United Arab Emirates appear to have spare production capacity.

But the analyst points out that Riyadh is currently flowing close to 11 million barrels of oil a day, a level it had reached only twice in its history, and only temporarily.

“The current level is way above your comfort level,” says Schieldrop.

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