Saudi breaks Opec logjam with further oil cuts

Reuters/Leonhard Foeger

The meeting of Opec+ that ended in Vienna yesterday turned into something much more ambitious than a simple decision on crude output levels.

In the run-up to the gathering, the talk was all “will they, won’t they” cut global oil supply in the face of uncertain global economic forecasts.

In the end, the verdict of the 23-strong grouping – led by Saudi Arabia and Russia – amounted to a strategy to reshape global oil markets for the next two years and beyond.

The “lollipop” offered by Saudi energy minister Prince Abdulaziz Bin Salman will probably grab the headlines. The kingdom will cut an extra one million barrels per day in July, and it has left itself the option to extend that reduction on a monthly basis for as long as it is required.

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“We will do whatever is necessary to bring stability to this market,” he said.

But it is the other parts of the overall package announced late on Sunday that will probably do more to set a course for crude over the next few years.

Notably these were an extension of the existing cuts until the end of 2024 and a much-needed clarification of the position regarding Russia and the UAE – the two most important members of Opec+ apart from Saudi Arabia. There was also the commitment to establish future baseline production levels for the rest of Opec+ in what Prince Abdulaziz called a “transparent and independent” manner.

Russia, with its deputy prime minister Alexander Novak in Vienna, sees its quota reduced, on paper, by some 600,000 barrels per day (bpd) under the new scheme, to 9.8m bpd.

In light of ongoing uncertainty as to whether it has implemented the 500,000 cuts it unilaterally announced in March, this is probably a moot point.

Its overall production levels will be assessed by the three independent assessors appointed by Opec – the IHS, Wood McKenzie and Rystadt Energy consultancies – who will also be looking at longer-term baseline levels for the whole group

The UAE did well enough out of the agreement for its energy minister Suhail Al Mazrouei to declare of his Opec+ partners that “we always understand each other”.

The Emirates will maintain their current cuts but will be allowed to increase output to 3.22m bpd in the future – presumably the first step along the way to their declared target of 5m bpd by 2027.

Reduced quotas were a cause for some intense late-night negotiation in Vienna, with Nigeria and Angola apparently reluctant to go along with the proposals.

As they have seldom in recent years met their quotas, you might think this was hair-splitting, but both have good reasons to want to be allowed to produce as much as possible – foreign investors in their energy industries might be deterred if they thought their potential return was being constrained by Opec.

Some observers saw a “clash” and a “fight” between the Africans and Opec on this issue; others saw a normal process of negotiation with some horse-trading on each side.

Whichever, it was probably the Saudi lollipop that broke the logjam.

This proposal, which would reduce Saudi oil output to the lowest level in years at around 9m bpd, was not included in the official Opec press release but presented by Prince Abdulaziz at the subsequent press conference.

“I want to see who will read the Saudi mind,” he said. Such inscrutability will only continue the feud between Opec and the “speculators” regarded as the real destabilising force in global oil markets.

These mind games with the short-sellers will continue into July, when the Saudi 1m bpd cut comes into effect, and could in theory roll on every month thereafter until the Saudis calculate that “stability” has been achieved.

Realistically, stability will still depend on the three factors that have put it in doubt for most of this year: the pace of recovery of the Chinese economy; American financial and economic wellbeing; and the course of the war in Ukraine, with all that means for global energy markets.

Those markets gave an early verdict on the Opec+ deliberations in Monday morning trading in Asia. The outcome was lukewarm.

When a number of Opec+ countries, including Saudi Arabia, unveiled their April surprise of 2m bpd cuts, Brent crude leapt around 8 percent immediately. The lollipop gathering on Sunday prompted a smaller initial jump, before markets fell back later. By mid-morning Brent was just above $77, a little over 1 percent up.

But it would be flippant to judge the impact of the latest Vienna meeting on one morning’s trading.

As Prince Abdulaziz told the media in Vienna: “This is not a toy, not a joke. It’s a real market.”

Frank Kane is AGBI Editor-at-Large