OPEC+ Production Cut Angers United States
Last week’s decision by the OPEC+ countries to cut their headline production limit by 2 million barrels per day provoked some anger in the US, Wood Mackenzie said.
Woodmac said that the actual production cut was smaller than the headlines imply and is coming as global demand for oil is faltering. The net impact on the market may be muted.
Democratic members of Congress proposed retaliatory measures, such as withdrawing US forces from Saudi Arabia and the United Arab Emirates. President Joe Biden said the cut was disappointing and described it as “unnecessary.” Karine Jean-Pierre, the White House press secretary, said it was “clear OPEC+ is aligning with Russia.”
Woodmac added that relations between the large oil-consuming countries and the OPEC+ group had been strained recently by the G7’s plan for a cap on the price of Russia’s oil exports. The proposed cap, championed by the US, is a novel policy experiment that seems unlikely to have much success in driving crude prices down. But just the fact that large consuming countries are attempting to cooperate is unwelcome for OPEC+ members. If the price cap does work at all, it could create a model to be used against other producing countries in the future.
Beyond any political tensions and geopolitical strategies, though, the OPEC+ countries had solid reasons to cut production. Brent crude had dropped by about $10 a barrel, from an average of $99.60 a barrel in August to an average of $89.90 in September, as fears grew about the possibility of a global recession. In China, economic growth has slowed sharply, in part because of lockdowns intended to prevent the spread of Covid-19. In the US, the UK, and the Eurozone, central banks have been ramping up interest rates to control inflation. The downside risks to oil demand are significant.
The OPEC+ group’s announcement of a 2 million bpd production cut from November took many by surprise. But it is less aggressive than that headline number suggests. Several members of the group are already producing well below their official maximums, so will not be affected by the new limits. Nigeria, for example, has a new “voluntary” maximum of 1.742 million bpd, but is currently only producing about 1 million bpd. Russia, too, is producing below its new limit of 10.478 million bpd.
There are just four countries carrying the burden of cutting production: Saudi Arabia, the United Arab Emirates, Kuwait, and Iraq. Together with some small adjustments from a few other countries, the actual reduction will end up being about 1 million bpd.
Meanwhile, global oil demand growth is slowing. World oil consumption is likely to be slightly lower in the fourth quarter of 2022 than in the same period of last year. The net result is that even after the production cuts take effect, global oil inventories will still be growing, at almost as fast a pace as seemed likely before the OPEC+ announcement, according to Wood Mackenzie’s latest Macro Oils report.
Prices did respond to the decision, with Brent rising from about $88 a barrel on the Monday before the OPEC+ meeting to about $98 by the end of the week, but they have subsequently dropped back a bit Ann-Louise Hittle, Wood Mackenzie’s head of Macro Oils, has left her price forecast unchanged: a strengthening during the rest of 2022, with Brent to average $97 per barrel in October, rising to an average of $103 per barrel for December.
This will probably create an even wider breach in the relationship with Saudi Arabia, which has been a key focus for US foreign policy since the 1940s. The two countries share many aims in common, not least the preservation of a stable international trading system for oil. Although tempers may be frayed and feelings running hot in Washington now, it is the cooler calculations of long-term US interests that are likely to prevail.
US Refiners Calling For New Oil Export Ban
Woodmac said that there was now widespread agreement that the near-total ban, which lasted from 1975 to 2015, was a glaring strategic mistake.
However, it is always rash to assume that any bad idea has been killed off so thoroughly that it cannot possibly be revived, and that seems to be the case with the US oil export ban, and the Biden administration said no options were “off the table” as potential responses to the OPEC+ decision.
A ban on refined products would at least avoid the specific ridiculousness of the crude ban that lasted until 2015. Because product exports remained unrestricted, prices in the US were set by global conditions, meaning that American consumers saw little or no benefit from lower domestic crude prices. But restrictions on product exports would also cause significant market distortions.
The heads of the American Fuel and Petrochemical Manufacturers and the American Petroleum Institute, the industry groups, last week wrote to Jennifer Granholm, the energy secretary, urging her not to impose a ban on fuel exports. Restricting those exports “would cut off important supply from the international market, putting upward pressure on prices, threatening the global flow of essential energy, undermining US allies and creating negative global economic consequences, including here in the United States.”.
“Record high US gasoline prices earlier this year, a fast-approaching midterm election, and an administration that is casting around for solutions to its energy challenges, are the kind of conditions that can foster attention-getting but ill-advised policy choices. But the weight of opinion against oil export bans is so solid, it would be a big surprise if the administration now decided to introduce one,” Woodmac said.
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