OPEC and Russia colluded again to cut oil production, but efforts to increase prices have so far been fruitless.
The Organization of Petroleum Exporting Countries (OPEC) and Russia will extend their voluntary oil production cut until the second quarter of 2024. The announcement came from Saudi Arabia’s press agency on Sunday.
Saudi Arabia is the de facto leader of OPEC, standing as the world’s largest exporter of crude and one of the few countries whose moves can change global oil prices.
Following the announcement, Brent did not react much, remaining around the $83/barrel level. Last month, global crude prices hovered around $77 per barrel.
Russia joined OPEC in its latest move. Since the Russian invasion of Ukraine, the Kremlin and Riyadh have colluded to artificially increase oil prices. For a moment in 2023, it was believed the price of crude could pass the psychological level of $100 per barrel.
According to the announcement, Saudi Arabia’s production cut will amount to 1 million barrels per day, while Russia’s to “just” 451,000. The Kremlin also recently announced a total halt in gasoline exports for six months starting on March 1st.
It’s not clear whether this move will actually increase oil prices. This cut is simply an extension of similar cuts made in 2022 and 2023, but oil prices have remained steadily low in the last few months.
A new phase in the oil war
At the beginning of the Russian invasion, the Kremlin and Riyadh were winning the oil war. Their production cut was raising prices in the United States and in Europe, which caused one of the worst energy crises since WWII.
Since then, however, oil prices have cooled despite increasing international tensions. They did not receive a boost even after Hamas’ attack on October 7th and the ensuing Middle East crisis. The same went after Houthi’s attacks on Red Sea shipping.
The two main reasons why prices remain low is the increased oil production in the United States (becoming the world’s largest producer) and decreasing global demand. The effects of the green transition, especially in China and Europe, are starting to affect the global crude trade.
According to the International Energy Agency (IEA), demand growth is set to decline by 1 million barrels per day in 2024, effectively rendering OPEC’s cut useless.
Moreover, Saudi Arabia halted its plans to increase oil production to 13 million barrels per day by 2027, citing low demand and the energy transition as reasons.
Low oil prices are especially harmful for Russia, which is forced to trade at roughly $20 per barrel lower than the global benchmark because of sanctions. The Kremlin needs oil revenues to finance its invasion of Ukraine, which has turned into a bloody position war.
