By Alexander Miller, consultant in emerging markets – Eurasia Business News, September 5, 2022
Russia and other OPEC+ members agreed for the first time since May 2020 to cut oil production in October by 100,000 barrels per day and thus return to the figures of August. The cartel noted the negative impact of volatility in the market and a decrease in liquidity
Since the current OPEC+ quota already significantly exceeds the real production of the cartel, the decision to reduce the quota looks symbolic.
Nevertheless, analysts say, it demonstrates the determination of OPEC+ to protect the current level of oil prices, including against the background of the G7 plans to introduce a ceiling on prices for Russian oil exports.
Russia and other Opec+ countries decided to reduce oil production quotas for October. Oil output in October will decrease by 100 thousand barrels (bpd) per day. Thus, the parties to the transaction returned to the level of production agreed for August. The Russian Deputy Prime Minister Alexander Novak linked the decision of OPEC+ with the slowdown in the global economy. The next meeting of the parties to the agreement is scheduled for October 5.
On reports of the decision of OPEC+, November futures for Brent on the London ICE exchange rose by almost 4%, to $96.47 per barrel.
Experts expected that the largest oil producers would be able to complete by the autumn the OPEC + agreement reached in May 2020, which assumed a total reduction in production by the parties to the deal of 9.7 million bpd. Then the oil output quotas gradually increased, but from the autumn of 2021, the size of the quotas and the real capabilities of the OPEC+ countries to increase production began to diverge.
The situation worsened in 2022 after the introduction of Western sanctions against Russia, which is why production in the country fell and has not yet recovered to the level of February. All this together led to the fact that already in July, OPEC+ production lagged behind the quota level by 2.9 million bpd. Only Sadovsky Arabia and the UAE have free capacities to increase production, and, accordingly, in practice, the change in quotas applies only to the production of these two countries. According to Reuters estimates, in general, OPEC free capacity may be 2-2.7 million bpd, which in any case will not cover the lag behind the target level.
Formally, in September, the Russian Federation and Saudi Arabia were supposed to increase production to 11 million bpd. However, on the contrary, Russia slightly reduced oil production in August, mainly due to a drop in the production of gas condensate due to a reduction in gas production from Gazprom.
Under these conditions, the decision of OPEC+ to reduce quotas does not so much affect the volume of oil supply, as it sends a signal to the market about what policy the cartel intends to pursue in the future.
In mid-August, the head of the Ministry of Energy of Saudi Arabia, Abdulaziz bin Salman, said that the paper oil market had become too volatile, “in a state of schizophrenia” and broke away from the physical oil market.
The decision of OPEC+ to reduce the quota was made shortly after the G7 countries announced their intention to introduce a ceiling on prices for oil exports from Russia. On September 5, the press secretary of the President of the Russian Federation, Dmitry Peskov, confirmed that the Russian Federation will not supply oil to countries that impose such restrictions.
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“The statements of some G7 leaders and the issues under consideration regarding the restoration of marginal prices for the purchase of Russian oil – this also introduces quite large uncertainties for the market,” said the Russian Deputy Prime Minister Alexander Novak.
Read also : Japan resumed oil imports from Russia in July
Against the background of a significant drop in oil quotes from the maximum in combination with a possible recession of the world economy, OPEC+ chose the path of a symbolic reduction in production in order to send a signal to the market and maintain prices at the current comfortable level for producers around $ 100 per barrel, says Anton Usov from Kept. In his opinion, the current decision of OPEC+ will not affect production plans in the Russian Federation, since the reduction is symbolic.
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