Energy analysts say deep production cuts could still backfire on OPEC kingpin and U.S. ally Saudi Arabia.
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The White House angrily pushed back against OPEC+ after the group of oil producers announced its biggest supply cut since 2020going after what President Joe Biden’s administration described as a “short-sighted” decision.
Energy analysts say deep production cuts could still backfire on OPEC kingpin and US ally Saudi Arabia, especially as Biden has hinted that Congress would soon seek to curb the influence of the Middle Eastern-dominated group on energy prices.
OPEC and non-OPEC allies, a group often referred to as OPEC+, agreed on Wednesday to cut oil production by 2 million barrels a day from November. The move aims to spur a recovery in oil prices, which had fallen to around $80 a barrel from over $120 in early June.
International reference Brent Crude futures were trading at $93.55 a barrel in Thursday morning trading in London, up around 0.2%. United States West Texas Intermediate futures, meanwhile, stood at $87.81, nearly 0.1% higher.
The United States had repeatedly called on the energy alliance, which includes Russia, to pump more to help the global economy and lower fuel prices before midterm elections next month.
In a reportthe White House said Biden was “disappointed with OPEC+’s short-sighted decision to cut production quotas as the global economy faces the continued negative impact of Putin’s invasion of Ukraine “.
He added that Biden had ordered the Department of Energy to release an additional 10 million barrels from the Strategic Petroleum Reserve next month.
“In light of today’s action, the Biden administration will also consult with Congress on additional tools and authorities to reduce OPEC’s control over energy prices,” the House said. White.
Strategists led by Helima Croft of RBC Capital Markets said that while the US has signaled further releases of strategic oil reserves are in sight, they are unlikely to see another blockbuster release in the near term. .
“A clearer risk, in our view, is the introduction of export restrictions on US products amid rising retail gasoline prices,” RBC Capital Markets analysts said.
“Congressional action on the NOPEC legislation also appears to be a credible outcome in light of the NSC’s statement on working with Congress to reduce OPEC’s overall influence in the oil market. the White House at NOPEC exerted a restraining influence on congressional leaders,” they continued. .
“Today’s whistle can be interpreted as a sign that the President will not necessarily oppose a floor vote on the bill that would declare OPEC a cartel and subject members to anti-trust legislation. -Sherman trust.”
The No Oil Producing and Exporting Cartels, or NOPEC, bill is designed to protect American consumers and businesses from artificial oil spikes.
The US legislation, which was passed by a Senate committee in early May but has yet to be enacted, could expose OPEC countries and partners to lawsuits for orchestrating supply cuts that drive up global prices crude.
To enter into force, the bill would need to be passed by the entire Senate and House, before being signed into law by the President.
The main ministers of OPEC have previously criticized the NOPEC billwarning that the US legislation would lead to greater chaos in energy markets.
Speaking at a press conference in Vienna, Austria on Wednesday, Saudi Energy Minister Prince Abdulaziz bin Salman said: “We will continue to prove that OPEC+ is here not just to stay. , but also to remain as a moderating force to bring stability”.
OPEC Secretary General Haitham Al Ghais also defended the group’s decision to impose deep production cuts, saying the alliance sought to ensure “security [and] stability in energy markets.
Asked by CNBC’s Hadley Gamble if OPEC+ was doing it at a price, Al Ghais replied, “Everything has a price. Energy security has a price too.”
Only three months ago, Biden arrived in Saudi Arabia on a mission to urge one of the world’s largest oil exporters to increase oil production to help lower gasoline prices. The trip was part of an effort to improve diplomatic relations with Riyadh, which fell apart after the murder of journalist Jamal Khashoggi in 2018.
Weeks later, however, OPEC+ boosted oil production by a miniscule 100,000 barrels per day in what has been widely interpreted as an insult to Biden.
Asked on Wednesday whether the group was using energy as a weapon following its decision to impose deep production cuts, Saudi Arabia’s Abdulaziz bin Salman replied: “Show me where the act of belligerence is – full stop. final”.
Energy analysts said the real impact of the group’s supply cuts for November would likely be limited, with unilateral cuts from Saudi Arabia, the United Arab Emirates, Iraq and Kuwait likely to do the main work.
Additionally, analysts said it is currently difficult for OPEC+ to form an opinion more than a month or two into the future as the energy market faces uncertainty from news. European sanctions against non-OPEC producer Russia amid the Kremlin assault on Ukraine – including on shipping insurance, price caps and oil import cuts.
“The Saudis say it was a market-driven decision, that they expect demand to drop over the winter – I don’t see how a reduction in that volume is anything other than a political statement,” Michael Stephens, a research associate at the Royal United Services Institute Think Tank in London, told CNBC.
“And even if it was based on technical reasons and purely on supply and demand, that’s not how it’s interpreted by the United States. And so the perception is 90% of the law. And the perception is that the Saudis are not keeping their end of the bargain,” he continued.
“The era we find ourselves in makes it clear that even if the Saudis coordinate with Russia on oil prices, it will be seen as overt support for Russia.”
Oil prices fell to around $80 from more than $120 in early June amid growing fears about the prospect of a global economic recession.
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Herman Wang, editor of OPEC and Middle East news at S&P Global Platts, told CNBC that OPEC+ is imposing deep production cuts in an effort to get them through a possible global economic downturn.
“But this comes at a politically risky time for the United States, which is heading into midterm elections, and the last thing the White House wants to see is a spike in gas prices,” Wang said.
“It adds a geopolitical element to what OPEC+ does, and while the group likes to say that it excludes politics from its decisions, it’s undeniable that there are potential ramifications to that beyond the price of oil. oil,” he added.
Speaking at a press conference during a visit to Chile, US Secretary of State Antony Blinken said on Wednesday Washington had made its views clear to OPEC members.
When asked if he was specifically disappointed with US ally Saudi Arabia, Blinken replied: “We have a multiplicity of interests regarding Saudi Arabia and I think the president exhibited during his trip”.
These include improving relations between Arab countries and Israel, Yemen and working closely with Riyadh to try to continue the truce, Blinken said.
“But we are working every day to ensure to the best of our abilities that, again, energy supply from anywhere actually meets demand to ensure energy is on the market and prices are kept low.”
Sen. Bernie Sanders, I-Vt., said via Twitter, “OPEC’s decision to cut production is a blatant attempt to raise gasoline prices at the pump that cannot last.”
“We must end the illegal OPEC price-fixing cartel, eliminate military assistance to Saudi Arabia and aggressively shift to renewable energy,” he added.