For Saudi Arabia, the only reason to stop cutting output to keep prices stable evaporated when it moved away from the US.
On Aug. 3, OPEC’s de facto leader Saudi Arabia announced that it would continue the additional 1 million barrels per day (bpd) cut in production it announced through at least June until September. At the same time, Russia will cut its oil exports by 300,000 bpd in September. These sustained cuts come on top of the OPEC+ oil cartel’s 3.66 million bpd in collective cuts implemented since October 2022. The key questions now are: Will OPEC+ keep oil prices from 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 sources in the Saudi Ministry of Energy stating that oil production could drop further if needed. For Saudi Arabia, the only possible reason to stop cutting production to keep prices rising evaporated when it formalized its departure from the US sphere of influence towards that of China and Russia with the recovery of the relations agreement agreed with Iran in March, brokered by Beijing.
The United States and its key 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 one of the main net importers of energy. For China, another net energy importer, these threats have diminished as they can buy oil and gas at substantial discounts to OPEC+ prices from Russia and many other OPEC+ members.
Saudi Arabia and its OPEC allies want to push prices as high as possible without stifling significant demand from their customers. Since the end of the disastrous 2014-2016 oil price war initiated by Saudi Arabia, these countries have had to undo 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 $78 Brent in 2023, which given its average extraction cost of $1-2 per barrel (the lowest in the world, along with Iran and Iraq) would appear to offer a substantial financial cushion. In practice, however, given its financial commitments for various socio-economic projects, the price of oil to break even is much higher and constantly increasing. The same is true to a greater or lesser degree for all OPEC countries.
As far as Russia is concerned, the strategy used was very simple, but effective: persuading Saudi Arabia to raise OPEC group oil prices as much as possible, while at the same time selling its own oil at a discount on this price, but above the official oil price ceiling. And there are many buyers for discounted Russian oil at or above the $60 barrel price ceiling, including China and India.
For the United States and its key allies, ever-rising oil and gas prices have caused dramatic spikes in inflation and the interest rates needed to combat it, which in turn make economic recessions more likely.
Historically every US$10 bp increase in the price of crude oil translates into a 25-30 cent increase in the price of a gallon of gasoline. For every penny that the average price per gallon of gasoline increases, more than $1 billion a year is lost in consumer spending and the US economy suffers. Since the end of World War I in 1918, the incumbent US president has won re-election 11 out of 11 times if the US economy was not in a recession, according to statistics from the US National Bureau of Economic Research . However, incumbent US presidents who entered a re-election campaign with the economy in a downturn have won only one out of seven times.
So what can the West do about it? The US attempt to get Saudi Arabia and other OPEC countries to stop their production cuts backfired when Saudi Crown Prince Mohammed bin Salman and his UAE counterpart Mohammed bin Zayed al Nahyan refused to take a phone call from President Joe Biden in early March 2022.
Meanwhile, there aren’t many short-term opportunities to dramatically increase production in US shale or conventional fields to offset the loss of OPEC production. Similarly, there is little realistic prospect that major releases of strategic oil reserves from both the US and International Energy Agency countries will be sustained as long as OPEC+ can continue to cut supplies.
This is one reason why, the United States has been in discussions with Iran since late June to implement a new version of the Joint Comprehensive Plan of Action (JCPOA) within the next three months. The aim is for the new deal to be in place before the winter months begin. The one key stipulation made by the United States in these ongoing negotiations is that Iran agrees to keep its uranium enrichment at 60 percent or below and that it again agrees to regular inspections by independent agencies.
In this agreement, there would also be greater oil and gas extractions from Iran to counter OPEC+ reductions: according to Kpler analysts, Iranian production could technically rise by 1.7 million barrels per day, with an immediate drop of 5-10 percent in the price of oil.
Original article published on Money.it Italy 2023-08-21 08:15:00. Original title: Perché l’OPEC+ farà tutto il possibile per far salire i prezzi del petrolio?
