Saudi Arabia, Russia may find their oil pricing power limited

    WORLD  05 October 2022 - 13:45

    Reduced global demand may offset any supply cut by OPEC and its allies.

    Even if Saudi Arabia and other leading oil-exporting countries cut their production targets this week, spurning U.S. efforts to keep supplies flowing, the move may barely register in global oil prices, The New York Times reports.

    An output cut by Saudi Arabia and its allies would reinforce the growing perception that Crown Prince Mohammed bin Salman of Saudi Arabia and President Vladimir V. Putin of Russia are working closely together to manage oil markets. That is not what President Biden had in mind when he visited Saudi Arabia in July, shared a fist bump with Prince Mohammed and called for more production.

    But the cut being considered — up to a million barrels a day by OPEC Plus — may amount to little more than symbolism, given countervailing forces in the global oil market.

    Global inventories and spare capacity are considered to be well below the levels that would assure stability. And, by early next year, European sanctions over Russia’s invasion of Ukraine are intended to tighten, in a bid to curb Russian oil sales, and the United States is planning to stop drawing down its Strategic Petroleum Reserve.

    Given those circumstances, a cutback by OPEC Plus — the confederation of the Organization of the Petroleum Exporting Countries and several other producers, including Russia — would ordinarily put a higher price on oil. This time, however, the decrease in supply would coincide with falling demand in China and Europe.

    After the Russian invasion of Ukraine in February, oil prices soared to over $130 a barrel, but they have since dropped to well below $90. That is mainly because predictions of a sharp decline in Russian exports have so far proven to be overblown, China has continued to lock down once-bustling cities to stop the spread of the coronavirus and the United States and its allies have released more than a million barrels a day from their reserves.

    “With crude oil prices off over 30 percent from their peak earlier this year, OPEC Plus is now worried about a recession reducing demand,” said Andrew Lipow, president of Lipow Oil Associates, a consulting firm in Houston. And higher oil prices could increase the likelihood of such an economic downturn.

    Experts question just how much OPEC Plus will actually cut. Only two of the 23 countries in the group — Saudi Arabia and the United Arab Emirates — are able to meet their current quotas.

    Energy experts say whatever OPEC Plus announces it will probably translate into a supply reduction of roughly 500,000 barrels a day, or about 0.5 percent of global supplies.

    “Not that big a deal,” said Rusty Braziel, executive chairman of RBN Energy, another Houston consulting firm. But, he added, “an OPEC Plus cut will definitely impact the market, just by the signal it sends that OPEC Plus stands ready to cut production to keep the price of oil from falling.”

    Gyrating prices in oil markets have become familiar in recent years.

    During the 2008-9 financial crisis, prices dropped to $35 a barrel from $145 in only five months. In 2014-15, as economic growth slowed, oil dropped more than 50 percent in nine months, to $45 a barrel. Prices climbed again until the Covid-19 pandemic hit, when demand collapsed. In a matter of hours, they briefly crashed to below zero from $18, as producers were forced to pay buyers to take oil they had no room to store.

    With their economies at stake, Saudi Arabia and its allies have aimed to stabilize the market as the world slowly recovers from the pandemic. After cutting nearly 10 million barrels a day of production during the pandemic, OPEC Plus gradually restored output until last month, when it announced a small decrease.

    “OPEC Plus wants $100 oil,” said Scott Sheffield, the chief executive of Pioneer Natural Resources, a major oil company in Texas. Mr. Sheffield predicted that oil would stabilize at $90 to $100 a barrel and stay there for as long as a slowing economy kept demand down. “There will be a small increase at the pump,” he said.

    The average price of a gallon of regular gasoline has declined to $3.80 from just over $5 on June 14, according to the AAA auto club, although it has climbed a bit in recent days.

    Over most of this year, the Biden administration, with limited success, urged Persian Gulf countries to pump more. While Mr. Biden has pushed to lower prices at the pump, the Saudis have been more concerned that prices are going too low and that global spare capacity is insufficient at a time of global instability.

    Russia wants the highest prices possible to compensate for reduced exports to Europe.

    Those prices are under pressure not only by a slowing economy but also by increased oil production in the United States, Guyana, Brazil and other countries. Kuwait and other OPEC Plus countries have been investing to expand production capacity.

    Unable to prod the Saudis and its allies to produce more, the Biden administration has released about 160 million barrels of crude from the strategic reserve since March. It recently extended those releases by another month.

    Lawrence J. Goldstein, the director of special projects at the Energy Policy Research Foundation, a research group in Washington, said the prospective OPEC Plus action “could interestingly trigger a move by the U.S. to speed up the release” from the strategic reserve, which was created in large part as a buffer against OPEC’s ability to squeeze world supplies.

    Such a tit for tat can go both ways, of course.

    “OPEC Plus could promise further cuts,” said Robert McNally, a former energy adviser to President George W. Bush, adding that the oil market “faces unusually large unknowns on the supply and demand sides.”

    Caliber.Az




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