OPEC Plus, the oil producers’ group that includes Russia, may announce a large production cut when it meets this week in order to shore up declining global oil prices. Oil production may be cut by 500,000 to one million barrels a day, or about 1 percent of global supply. Such an announcement would be a rebuke to President Biden, particularly by Saudi Arabia, the cartel’s leader. In July, President Biden visited Saudi Arabia to request more oil production to reduce gasoline prices, hoping to make them more palatable to the American public as the mid-term elections approach. Saudi Arabia has kept Russia as a member of the group despite Western sanctions on Russia due to its invasion of Ukraine.
OPEC Plus has not kept oil production at targeted levels, running short for various reasons. Should the cut be agreed on, it will be the group’s second consecutive monthly cut after reducing output by 100,000 barrels per day last month. OPEC+ missed its production targets by almost 3 million barrels per day in July, as sanctions on some members and low investment by others stymied its ability to increase output.
This production cut to be discussed at its October 5 meeting would be the biggest cut since 2020 when OPEC Plus reduced output by a record 10 million barrels per day as demand crashed due to the COVID pandemic and lockdowns. It took the next two years for OPEC to unwind that record production cut. Recently, sources have indicated that the cut could exceed 1 million barrels per day and could also include a voluntary additional reduction of oil production by Saudi Arabia. That announcement resulted in an increase in oil prices of more than $3 a barrel. Brent oil futures for December delivery increased $3.02 to $88.16 a barrel, a 3.6 percent increase. U.S. West Texas Intermediate oil increased $3.20, or 4 percent, to $82.69 a barrel. Oil prices had declined for four straight months since June, a 25 percent reduction, as COVID-19 lockdowns in China reduced demand as did recession fears in U.S. markets.
UBS and JP Morgan have suggested that a cut of around 1 million barrels per day could help arrest the oil price decline. Apparently, OPEC Plus leadership wants to safeguard an oil price floor of $90 per barrel, according to one analyst.
Uncertainties and Issues
What OPEC Plus means by a production cut is far from clear since the group has already missed its targets by a lot, as mentioned above. In August, for instance, Russia came up short a million barrels a day of its quota of 11 million barrels, according to the International Energy Agency. A production cut that is meaningful would probably need a substantial reduction by Saudi Arabia, the largest producer in the group.
A real cut in oil supplies by OPEC Plus would raise oil prices, which has already occurred from just the announcement, and could increase the likelihood of a global downturn. Because oil inventories are at low levels, oil demand could rise, increasing prices based on market forces that would be a double whammy to increasing oil prices.
A major unknown is the future output of Russia, the co-chair of OPEC Plus. Russian oil production has held up better than many expected under sanctions imposed by the West over Russia’s invasion of Ukraine. In fact, Russia’s seaborne oil exports averaged 3.4 million barrels per day during the seven months since the war began. That is up 17 percent versus the same period in 2021. Russian production, however, may fall more when the European Union tightens sanctions on Russia later this year.
Also uncertain is Russia’s status in the organization. Saudi Arabia appears to want to keep Russia, one of the world’s largest oil and natural gas producers, as a key member of the OPEC Plus group, even though sanctions will likely make it difficult for Russia to meet its current production targets. Russia’s oil and gas industry may be headed for an almost certain medium-term decline because Western companies will no longer supply it with technology. Saudi Arabia appears to be betting that Russia will remain a key player in energy markets.
Saudi Arabia also wants to make sure that OPEC Plus continues. The oil agreement on production management that binds OPEC Plus together expires at the end of the year. Saudi Arabia wants the market management arrangements to continue, but discussion will probably be required on extending the deal. Biden Fiddled with the Market.
Biden Fiddled with the Market
Three times President Biden announced oil releases from the U.S. Strategic Petroleum Reserve—an emergency reserve of oil—first in November 2021 when gasoline prices started escalating due to Biden’s anti-oil and gas policies, then on March 1 to alleviate further oil price increases caused by Russia’s invasion of Ukraine, and then on March 31. The first SPR release was a 50-million-barrel release, the second was a 30-million-barrel release and the third was a 180-million-barrel release to cover a six-month period. Oil prices have more than doubled since Biden took over the Presidency. In June, national average gasoline prices reached an all-time high of $5 per gallon.
Biden spread out the third release so that gasoline prices could be kept in check through the mid-term election, releasing 155 million barrels of oil to date of the third release. Biden’s Department of Energy is extending the period in which it aims to sell 180 million barrels of crude oil by delivering the oil from November 1 to November 30 from sales in September. That sale will bring the amount released to 165 million barrels out of the 180 million barrels that Biden announced he would sell on March 31. On September 6, the emergency reserve fell to its lowest level since November 1984. Biden has even sold U.S. emergency reserve oil to China, whose state agency bought almost 6 million barrels.
The Biden administration is considering replenishing the Strategic Petroleum Reserve when oil prices drop below $80 a barrel, which does not seem likely with OPEC+’s latest move. In March of 2020, President Trump wanted to stabilize the domestic oil industry after Covid-19 hit and global petroleum demand tanked by spending $3 billion to fill the reserve with oil selling at about $24 a barrel. But the Democrats in Congress voted against it. It will now take more oil to fill the reserve than two years ago. The replacement of the 260 million barrels Biden plans to ultimately drain from the SPR would cost $21.58 billion at today’s $83 per barrel.
In March 2020, the reserve had 634 million barrels stored out of a capacity of 727 million barrels. After Biden’s record drawdown, the reserve is down to 427 million barrels–its lowest level since 1984, which is a problem since U.S. consumption is also much higher today than it was in 1984. Further, much of the oil that remains cannot be efficiently processed by U.S. refiners.
As a result, forecasters are estimating an increase in gasoline prices once SPR releases end. An equities analyst at Morningstar expects gas prices to “remain relatively high,” between $3.50 and $4 a gallon in the coming months. Goldman Sachs had forecast that gas prices would be back to $5 a gallon by the end of the year, though the late SPR releases may taper that price.
Conclusion
OPEC Plus is not a friend of Biden’s and it is threatening to reduce oil production to raise oil prices, which the cartel would like to stabilize at around $90 per barrel. The cartel has not kept to its past production targets due to various reasons and it may not be able to control this decrease, but oil prices have already risen by over $3 a barrel due to the announcement. Meanwhile, President Biden’s relentless efforts to slow energy production in the United States have placed the nation in increasing jeopardy of rising prices and unable to counter OPEC Plus production cuts. A new study by the Committee to Unleash Prosperity estimates that the United States would be producing between two and three million more barrels of oil a day if the Trump Administration’s energy policies had continued.
There are numerous uncertainties around OPEC’s production cut, including whether sanctions will reduce Russian output. Rather than allowing markets to balance supply and demand through price changes, Biden has sold oil from the Strategic Petroleum Reserve—an emergency reserve—to counter increasing gasoline prices. Sales and deliveries have continued through the mid-term election to arrest American fears regarding inflation and a recession. But, if OPEC+ can truly cut oil production, Biden’s SPR releases may backfire and gasoline prices may increase with the oil price increases OPEC+ wants, and there will be fewer emergency reserves to count on if the nation needs them.
