Several OPEC+ countries are extending additional voluntary cuts of 2.2 million barrels per day, aimed at supporting what they are labeling “the stability and balance of the oil market” until the end of June, the OPEC Secretariat announced in Vienna on March 3.
OPEC+, which refers to the coalition of the Organization for the Petroleum Exporting Countries and its allies, including Russia, is concerned over global growth and rising output outside the group.
OPEC-kingpin Saudi Arabia will extend its voluntary crude production cut of 1 million barrels per day. Moreover, these additional voluntary cuts are announced by the following OPEC+ countries: Iraq (220,000 barrels per day); United Arab Emirates (163,000 barrels per day); Kuwait (135,000 barrels per day); Kazakhstan (82,000 barrels per day); Algeria (51,000 barrels per day); and Oman (42,000 barrels per day) for the second quarter of 2024. Afterwards, in order to support market stability, these voluntary cuts will be returned gradually subject to market conditions.
The OPEC Secretariat explained that the above will be in addition to the announced voluntary cut by Russia of 471,000 barrels per day for the second quarter of 2024, which will be from crude oil production and exports as follows: In April 350,000 barrels per day from production and 121,000 barrels per day from exports. In May 400,000 barrels per day from production and 71,000 barrels per day from exports. In June 471,000 barrels per day – cut only from the production level.
Russia’s voluntary production cut is in addition to the voluntary cut of 500,000 barrels per day previously announced in April 2023, which extends until the end of December 2024. The export cuts will be made from the average export levels of the months of May and June of 2023.
Interfax quoted Russian President Vladimir Putin as saying on March 5 the point of the OPEC+ alliance was to “regulate prices on the market.” Putin added “We are not going to raise prices indefinitely, because it reflects badly on manufacturers, it reflects badly on consumers. But we want to achieve stability. We have been able to do this so far.”
Oil prices have remained between $75 and $85 per barrel despite geopolitical tensions, including Houthi commercial shipping attacks in the crucial Red Sea route and ongoing spillover risk from the Israel-Hamas war. This sharply contradicts dire “worst-case” predictions widely seen across the global media since the Houthi attacks began in late 2023.
Saudi Arabia and the United Arab Emirates are the main drivers of OPEC policy today, Chris Weafer, co-founder of Macro Advisory, a Strategic Eurasia Consulting based in Tashkent, Uzbekistan, told NE Global on March 7. “The leaders of both countries have acknowledged that the global energy market is changing and even though nobody expects demand for oil to collapse over the near-term, the two OPEC leaders accept that the conditions which have allowed OPEC to control oil pricing are coming to an end. That may be in 10 years. It could be earlier and is most unlikely to be much longer,” Weafer said.
“This is because of the accelerating move towards renewable energy sources and, in particular, the electrification of global transportation. At that point, OPEC states will still be exporting oil but at a much lower average oil price and with OPEC’s current pricing power completely gone,” he explained, noting that it means that OPEC producers want to maximize their revenue from oil exports while they can still control the price, and to use that money to diversify their economies and create alternative growth drivers for future generations.
“Hence the focus on technology, on trying to become global leaders in future energy, on tourism and in positioning the Gulf as more than just a source of oil. Hence the major sporting events and promotions we now see in Saudi Arabia, in Qatar and in the UAE,” he said.
Weafer argued that the Gulf countries want to keep the price of Brent oil supported above $80 per barrel and will try to position it close to $100 per barrel when demand conditions improve. He noted that $100 is viewed as an optimal price for both the producers and consumers during the remaining energy transition years. “Neither Saudi nor the UAE want the price to fall much lower as that could set a low benchmark from which it would be difficult to move higher in the next few years, i.e… assuming global oil demand picks up as expected by the IEA (International Energy Agency),” he said, arguing that it is much better to establish the support price around $80 per barrel as that would make it easier to move forward to the $100 target later.
“This is why Saudi Arabia, and the UAE are willing to cut supply today – they want to keep the price of Brent as close to $80 as possible so they can restore oil volumes and at a rising price later. It is a case of short-term pain for longer-term gain,” Weafer said.
Impact on the global oil market and prices
Weafer argued that the global oil market, on the supply side, is now more under the control of OPEC than it has been for a long time. “Russia is producing at near maximum, i.e. given the disruptions it is now experiencing in some older fields and in some refineries due to a shortage of spare parts because of sanctions. Russia is in fact the world’s biggest oil exporter after the last round of cuts by Saudi Arabia,” he said.
According to Weafer, Russia exports approximately 3.4 million barrels of crude by tanker plus approximately 1 million directly to China via the Eastern Siberia–Pacific Ocean oil pipeline (ESPO) and approximately 2.4 million barrels per day of refined product. So approximately 6.8 million barrels in total, on a daily basis.
Moscow has, from March 1, cut the export of gasoline because of the disruptions in some refineries, Weafer said, adding that LUKOIL’s biggest refinery in Nizhny Novgorod has cut output because of a lack of spare parts, so that is now part of Russia’s contribution to the OPEC+ cuts.
“Iran is reportedly now exporting at maximum – 1.8 million barrels per day – and U.S. production growth has stopped,” he said. “So, the supply side is now much more under OPEC’s control than it has been for a long time,” Weafer explained, adding that so long as Saudi Arabia Crown Prince Mohammed bin Salman and UAE President Mohamed bin Zayed stick with the strategy of maintaining a price support level around $80 per barrel, from which to build when demand picks up, then the oil market should remain relatively stable, although as usual, more prone to supply side shocks if, for example, an oil tanker is sunk in the Red Sea or sanctions force a bigger-than-expected cut in Russian exports. “Other than that, the price of Brent looks relatively safe around the $80 per barrel level,” he said.
OPEC+ oil output cuts help Russia
Asked if Saudi decision to extend supply cuts help Russia’s economy and fund Moscow’s war against Ukraine, upsetting relations with Washington, Weafer argued that Russia is gaining from the Saudi and UAE strategy in that, if they had not cut supply, then the price of Brent would likely be in the $60s per barrel and the price of Russian crude exports would probably be in the low $50s. “At that level the budget would be under significant strain and would force spending cuts. But it is a case that Russia is benefiting by default from the OPEC action,” he said.
“There is no reason to assume that Riyadh or Abu Dhabi is taking this action (supply cuts) to support Russia. Their key consideration is current oil price support so they can build on it later and generate enough revenue to change their respective economies,” he explained, adding, “The Gulf states have not adopted western sanctions against Russia but have made very public efforts to block the use of their banks or territory by those trying to avoid sanctions. All countries have declared a position of neutrality in the Russia-Ukraine conflict and are expected to stick with it. For Moscow this is a fortunate coincidence.”
Meanwhile, Francesco Sassi, research fellow in energy geopolitics and markets at RIE in Bologna, Italy, told NE Global on March 7, “The decision to prolong the voluntary cuts is photographing a very unsettled situation for oil producers on global markets and it confirms that the strategic axis existing between the Gulf Monarchies and the Russian Federation is strengthening as Riyadh and Moscow cannot do without each other, and important global allies, to counterbalance the surging production capacity by non-OPEC suppliers, in particular the U.S., Canada, Brazil and Guyana.” Currently this remains the only option for Riyadh to squeeze output while receiving sufficient revenues to keep up its economic diversification strategy towards 2030, Sassi underlined.
“The cooperation certainly helps Russia, which finds in Riyadh a very helpful partner to coordinate around 40 percent of global oil production and keep prices higher compared to any alternative scenario where the OPEC+ alliance free participants’ output and does not restrict exports,” Sassi argued, adding, “Washington has been growingly disturbed by the support Middle Eastern countries are giving to Moscow and secondary sanctions recently imposed by the U.S. to regional actors are aimed at scaring away others from joining the fruitful trade of Russian crude and oil products. Only time and a serious enforcement will tell us if this works to further pressure Moscow.”
The bottom line — smiles in Moscow
There are certainly totally legitimate reasons for all oil producers to want to maximize revenues, such as creating new, oil-free future economies in place of their current structures. While this must be clearly understood, leaders in the Western democracies are less inclined to accept this fact happily when the oil producers conspire directly to raise prices in a year when they collectively face important elections, while also keeping inflation levels above the key two percent target of western central bankers. And it is absolutely impossible to argue that OPEC+ leaders have not been advised of the potential political consequences of their actions, which in today’s global geopolitical calculus amounts to overt support for inflation-driven political disruption at a minimum, and ultimately translates into support Putin’s long term anti-western goals.
