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Friday, December 2, 2022

OPEC and Other Oil Producing Countries Are Considering Significant Production Cuts to Support Oil Prices

According to a source who is aware with the thinking of Saudi Arabia, the organization’s de facto head, OPEC Plus, the oil producers’ group, is contemplating announcing a significant decrease in output when it meets on Wednesday. This information was provided by the person. After the Biden administration had pressured the Saudi government to raise production, such a decision, which experts say is largely predicted and would be a blow to the administration, would be highly expected.

A reduction in production would also represent a significant shift in strategy for OPEC Plus, which includes Russia. Since the group decided to cut back on oil production in the beginning of 2020 in response to a precipitous drop in demand brought on by the coronavirus pandemic, the producers have announced a series of consistent monthly increases, even though they have, for the most part, not been able to meet their goals.

According to many analysts, the Saudis look intent on driving up oil prices to somewhere around $90 per barrel. Since reaching their all-time high in June, oil prices have seen a significant decline, with Brent crude, the worldwide benchmark, trading at about $85 per barrel on Friday. In the early hours of trade on Sunday night, commodity prices inched upward as news sources indicated that OPEC Plus would reduce their output.

A source who is acquainted with the thinking of Saudi Arabia indicated that it looked probable that a cut of that amount would be implemented. According to him, the global economy is in a state of decline, which is causing a decrease in demand for oil, which has led to an oversupply on the market.

A drop in production of 100,000 barrels per day that was primarily symbolic was the Saudis’ way of signalling a more aggressive stance last month. According to observers, at this point, they may believe that it is time to make a more forceful statement.

A significant cut by Saudi Arabia would appear to be an act of defiance toward the Biden administration, which has pushed the Saudis and other members of OPEC to supply enough oil to keep a lid on prices. The Biden administration has been pushing the Saudis and other OPEC members to supply enough oil. In spite of the fact that he disapproved of the killing of Saudi dissident Jamal Khashoggi by Saudi agents in 2018, President Biden travelled to the Kingdom in July.

It would seem that OPEC Plus is attempting to exert influence over a market that is difficult to analyse. It is possible that concerns about variables such as increasing interest rates by central banks throughout the globe are to blame for a significant portion of the recent drop in prices rather than the fundamentals of the oil market. In addition, it is quite difficult to predict how well the global economy will do in the future weeks and months. Nevertheless, the chance of a worldwide recession may be increased if OPEC Plus were to reduce oil supply, which would have the effect of driving up oil prices.

Despite the fact that prices may be under pressure, oil inventories, which refer to the amounts stored in tank farms, remain at low levels, which indicates that the market might swiftly flip around and move in the other direction.

The production that will be produced in the future by Russia, which is the co-chair of OPEC Plus, is a significant uncertainty. The sanctions implemented by the West as a result of the conflict in Ukraine have had less of an effect on Russia’s oil output than many observers anticipated they would have. However, it is possible that Russian output may drop much more when the European Union imposes further sanctions on Russia later this year.

It’s also not quite clear what OPEC Plus implies when it refers to a decrease in production. Already, the organisation has been falling far short of the goals it set for itself by a metaphorical mile. According to the estimates provided by the International Energy Agency, an organisation with headquarters in Paris, Russia fell short of its daily limit of 11 million barrels by one million barrels for the month of August.

The position that Russia will have inside the organisation is another unknown. It is practically inevitable that Moscow’s oil and gas sector will also see a decrease in the medium term as a result of the fact that Western corporations will no longer provide it with technology. The Saudis seem to be placing their bets on the fact that Russia will continue to be an important participant in the oil markets despite these drawbacks.

Additionally, the Saudis are working to ensure that OPEC Plus will continue its operations. At the conclusion of the current year, the oil agreement on production control that keeps OPEC Plus together will come to an end. The Saudis want that the market management arrangements go on, but it is likely that further in-depth conversation is going to be necessary before the accord can be extended. It is possible that the need of holding such conversations as soon as possible was a primary factor in the group’s decision to meet in person for the first time since the beginning of the epidemic on Wednesday in Vienna.

David Faber
I am a Business Journalist of The National Era
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