Opec+ decides to wait and see on global oil markets

Reuters

The weekend meeting of Opec+ had been billed by some observers as a crunch meeting at which the alliance, led by Saudi Arabia, would have to give in to American demands for increased output, or risk renewed confrontation with the White House.

The logic went that President Joe Biden’s summer visit to the kingdom had resulted in an understanding that the Saudis – the biggest producers within Opec+ – would increase supply as the US had been demanding.

When this failed to materialise at the October Opec+ meeting, which, much to American chagrin, actually opted for two million barrels of cuts, they would surely have to increase at the next meeting in December, wouldn’t they?

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That line of thinking was always flawed. For one thing, no such promise was given by the Saudis in the summer.

Prince Abdulaziz Bin Salman, the energy minister, has made it transparently clear in the three years he has been in charge of the kingdom’s oil policy that pragmatism, proactivity and flexibility were the key words in his thinking.

A pledge to lift output, regardless of market circumstances, would have gone directly against that doctrine.

Another over-riding reason was that it was apparent in October that global oil markets were caught in a maelstrom of conflicting forces that would have made any such promise nonsensical.

Only a fool would have promised to increase output when there were warning signs flashing all over the prospects for global demand. China was still in the grip of zero-Covid lockdowns that were seriously impacting economic activity.

There was a big question mark over supply too as the G7 and the EU were planning to bring in strict sanctions against Russian oil because of its invasion of Ukraine.

Those measures are now in place, and it remains to be seen what long-term effect they will have on global oil markets. They may not be sufficient to choke off Russian oil revenue, but most experts agree that over time they will reduce overall volumes.

On the other side of the oil equation, there are signs that China will loosen its strict anti-Covid measures, in theory releasing a wave of pent-up demand for crude as economic growth resumes.

Sunday’s virtual meeting of Opec+ did the sensible thing: it held output to where it was in October, but made clear that it was ready and willing to intervene whenever it thought the circumstances warranted it.

In this respect, there has been a subtle but significant shift in Saudi thinking about Opec+ in the past few months.

When monthly meetings of producers were first proposed a couple of years ago, the argument was that Opec+ should be more like the US Federal Reserve, holding regular gatherings and delivering a monthly verdict on markets and output.

That thinking has now been de-emphasised. Opec+ watchers will now have to wait until next June for the next formal gathering of the ministerial group in Vienna (physical or virtual), although the Joint Ministerial Monitoring Committee will keep a more frequent eye on things and has the power to request a full Opec+ meeting if market circumstances require it.

This does not imply that Saudi Arabia or Opec+ are content to let the market drift. The oil price – although up 2.5 percent at $87.70 per barrel today – has drifted back to where it was before the Russian invasion, and further significant falls would set alarm bells ringing.

So the Opec+ decision was a careful and considered wait and see. In such tumultuous and uncertain times for global oil markets, and the global economy, surely that was the right thing to do.

Frank Kane is a communications adviser and an award-winning business and finance journalist