Saudi and Russian oil cuts add to palace intrigue at Opec

Reuters/Alexander Manzyuk

Two major announcements on oil policy – from Saudi Arabia and Russia – have added to the intrigue ahead of the 8th Opec International Seminar, which begins on Wednesday.

Delegates at the event, being staged in the Habsburg grandeur of the Hofburg Palace in Vienna, will have plenty of time to analyse the implications of the moves, which come at a tricky time for global oil markets.

Saudi Arabia revealed on Monday that it is extending its “lollipop” cuts of 1 million barrels per day into August.

When the cuts were unveiled by energy minister Prince Abdulaziz bin Salman at the beginning of June, they were for the month of July, with an option to extend. That uncertainty is now removed for August trading at least.

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Moments after the news from Riyadh, Russian deputy prime minister Alexander Novak said his country would reduce oil exports by a further 500,000 barrels in August.

Markets immediately recognised the significance, with Brent crude jumping above the $75 level where it has hovered for most of the past month. Where it goes from here will be hotly debated in Vienna.

The seminar is not a policy-making body like the ministerial meetings of Opec+, the oil alliance led by Saudi Arabia and Russia, but the cast is largely the same.

Attendees will want to know what the moves mean for a delicately balanced crude market that looks like it could go either way. 

There is a general feeling among market watchers that, without the “surprise” April cuts and the “lollipop” in June, prices would have been significantly weaker than they are today.

Both pictures: Reuters/Leonhard Foeger

Doubts persist about the strength of demand in the second half of the year. While the International Energy Agency and Opec itself are sticking to bullish forecasts of more than 2 million bpd in extra demand by the end of 2023, other experts are more cautious, pointing in particular to concerns about the durability of the Chinese economic recovery.

There is also a consensus that “there is plenty of oil in the world”, with Russia until now exporting roughly as much as it did before the invasion of Ukraine (though at a considerably lower price). Increased exports from Iran and Venezuela are adding to supply-side buoyancy.

One immediate question is whether Saudi Arabia will extend the cuts beyond August.

Helima Croft, the RBC Capital executive who is sometimes called the “Opec whisperer”, recently highlighted that the Saudis are committed to doing “whatever is necessary” to bring stability to global markets. The consistent thread of Riyadh’s oil policy has been the imperative to remain activist and pre-emptive in oil markets.

Novak’s announcement is more enigmatic. Russia said in March that it would cut production by 500,000 bpd in protest at the imposition of price caps by the US and some western allies. There was little sign that these reductions were ever implemented.

The most recent cuts relate to oil exports, not production, and could be interpreted as Russia’s acknowledgment that it had not fully lived up to its word in the past, especially as its ally Saudi Arabia was bearing the brunt of cuts and consequent revenue reductions.

If these export cuts are fully implemented, it could have a significant tightening effect on the global market in the second half of the year. Opec members will be grateful if that translates into higher prices

The US is, of course, not a member of Opec and therefore not formally involved in the Vienna seminar, but there will be some important American policy-makers and industry executives in attendance.

The Biden administration might be feeling emboldened by the impact of its anti-Russian policies. There is no shortage of oil on global markets, keeping pump prices down, but Moscow is suffering a reduction of around 20 percent in the revenue it is getting from its exports. The latest cuts will reduce income further.

Now the question for the US and its western allies is whether to ratchet up the sanctions and price caps, especially in the event of another serious escalation in Ukraine, and what the repercussions might be.

Christof Ruehl, senior research scholar at the Centre for Global Energy Policy at Columbia University, told a Gulf Intelligence webinar last weekend that the Russians could “generate an oil price crisis if things go wrong on the battlefield”.

Frank Kane is Editor-at-Large of AGBI