Behind the scenes at the controversial OPEC+ meeting

Reuters

It was clear from the word go that the October ministerial meeting of OPEC+ was a big one as it was hurriedly turned from an online event to an in-person meeting just four days before the event.

And indeed, it was. The grouping decided on the biggest cuts – two million barrels per day (bpd) – since the beginning of the pandemic in April 2020.

The Declaration of Cooperation, (DOC) was also extended through to the end of 2023. (The DOC is the mechanism binding the 13 OPEC nations to the 10 non-OPEC countries led by Russia.)

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The real numbers look different, because the two million bpd are calculated on the “required production levels” from August 2022. OPEC+ has not been able to produce to the promised levels for many months.

Therefore, the calculation results in real cuts amounting to 800,000 bpd to one million bpd, depending on the source. The bulk of the cuts come from Saudi Arabia, the UAE and Kuwait and will take effect as of November. 

The oil price reacted sluggishly to the OPEC+ announcement, rising by around 1.7 percent, and reaching $93.21 per barrel by October 6 at midday Central European Summer Time.

That came on the back of a nine percent-plus rise since Friday, when the rumour mill of a large cut had kicked in.

However, Brent had lost more that 25 percent during Q3, which clearly had an impact on the decision. 

The numbers are neither here nor there. What matters are the optics, both from a markets, as well as from a geopolitical perspective.

Markets at the moment are jittery. OPEC+ explained the move as a pre-emptive action given the uncertainties facing the global economy.

The biggest concern was the fear of a recession and the aggressive tightening policies of central banks aimed at containing inflation, even, in the opinion of OPEC+, at the expense of economic growth.  

What added to the uncertainty in the mind of OPEC+ decision makers was that hours earlier the EU had announced its intended price cap on Russian oil, because the implementation and real effectiveness of this policy is yet unknown.

Analysts expect the price of oil to rise, adding inflationary pressures. In its September oil market report, OPEC still foresees a robust demand growth of 2.1 million bpd for 2023 – with the caveat that it is dependent on the economic situation at the time.

This makes sense when considering that China will exit its zero coronavirus policy at some stage, which will add to demand.

At the press conference, OPEC+ was at pains to explain that the cut was intended as a pre-emptive move to counter a potential global recession.

This is not the first time OPEC+ has reacted decisively ahead of an economic downturn. We saw a similar move in 2008 just before the global financial crisis.

Irrespective of the level of the cuts, spare capacity in OPEC+ comes in at around two percent of global demand.

So, unless there is serious investment in the sector, or a sharp decline in demand, oil prices are bound to follow an upward trajectory for the time being.

However, upstream investment in the sector has a considerable time lag between money committed and the flow of first oil. So, we are in for a bumpy ride anyway. 

Reuters/Elizabeth Frantz

The geopolitical dimension of this decision is also very important. The White House reacted strongly against the OPEC+ decision.

Mid-term elections are imminent and voters will evaluate the administration in large parts by the price for gasoline at the pump.

What may weigh even more heavily in the eyes of Western policymakers is the extension of the DOC, which is seen by the West as Saudi Arabia openly siding with Russia.

Many commentaries focused on the fact that since the Biden MBS fist-bump in Jeddah in the summer, Saudi US relations had not improved and that the outcome of the OPEC+ meeting did nothing to change that.

That is the case: the rhetoric has clearly ratcheted up. The White House insinuated that it would consult with Congress on the next steps, which should be read as a revival of discussions around a possible NOPEC legislation.

The No Oil Producing and Exporting Cartels (NOPEC) bill is intended to protect US consumers from attempts to engineer oil price spikes and would open OPEC members up to potential antitrust lawsuits.

Whichever way you look at the situation, geopolitics became frostier just as we can feel the autumn chill in Vienna.

What is needed now are open channels of communication, cool heads, and real engagement in terms of geopolitics and markets. The West (OECD / G7) and GCC nations can only gain from engaging. The world at large will lose if they fail to do so.

Cornelia Meyer is a business consultant, macro-economist and CEO of Meyer Resources