Hong Kong News

Nonpartisan, Noncommercial, unconstrained.
Friday, Oct 11, 2024

OPEC+ oil production cuts are a surprise move - so what are the factors at play?

OPEC+ oil production cuts are a surprise move - so what are the factors at play?

From dissatisfaction at the price of oil to geopolitics and the need for economic protection, there are a number of factors involved in the surprise announcement.

The surprise production cuts announced by OPEC+ at the weekend appear to have been motivated by a number of factors.

The most obvious is that OPEC+ is clearly unhappy with the price at which oil has been trading. Brent crude has been below $90 a barrel since mid-November and, during the last few weeks, has gone as low as $70.12.

The Saudis in particular appear unhappy that crude has been trading broadly within a band of $70 to $80 a barrel and presumably would like to set a floor in the price at the upper end of that range.

The kingdom's de facto ruler, Crown Prince Mohammed bin Salman, is investing billions of dollars in Vision 2030, his strategic plan to diversify the Saudi economy away from energy, which includes building a new mega-city in the desert and opening the country to tourists and cultural visitors. That programme requires oil prices to remain at a certain level.

Protection from an economic downturn

A second motivation could be that OPEC+ is seeking to protect itself from a possible economic downturn. Those fears will have intensified during the recent turmoil in the banking markets to which, ironically, the Saudis themselves contributed.

The state-controlled Saudi National Bank was the biggest single shareholder in Credit Suisse. Comments from its chairman (who has since been replaced) that it would not be participating in any equity fundraising contributed to the loss of confidence in Switzerland's second-largest lender.

It is perhaps no coincidence that the recent dip in the price of Brent crude - to its lowest level since December 2021 - came the morning after the rescue of Credit Suisse by its domestic rival UBS had been announced by the Swiss government.

So this may, as Jeff Currie, the head of commodity research at Goldman Sachs, suggested today, have been a precautionary move.

Saudi irritation

A third factor is almost certainly likely to be Saudi irritation at recent comments from the Biden administration. The US has been drawing down crude from its Strategic Petroleum Reserve (SPR) - an emergency reserve created in 1975 in the wake of the energy crisis sparked by the Yom Kippur War in October 1973 - to mitigate the impact of higher crude prices on American households and businesses.

The Biden administration had previously promised the Saudis it would replenish the SPR, but said last week it would now not be doing so. That will have angered the Saudis, who will also be keen to use this incident as an opportunity to remind the US of its pricing power in the crude market, something which has at various times during the last decade appeared to be threatened by US shale producers.

A continuing trend between the US and Saudi Arabia

A fourth, related, factor is geopolitics. It is being suggested in some quarters that the Saudis wish to reinforce to the White House that the US is not as influential a player in the Gulf region and the Middle East as it has been in the past. Riyadh, traditionally a staunch security partner of the US in the region, has been making increasingly clear its desire to form a wider group of partners.

Nowhere was this emphasised more strongly than in the recent diplomatic agreement reached with Iran, traditionally the kingdom's arch-rival, which was brokered by China. Beijing will have enjoyed watching the kingdom cocking a snook at Mr Biden.

This can be seen as the continuation of a trend: Mr Biden had been critical of Riyadh even before he was elected president and is under pressure from many in his party to dial down the relationship with the Saudis even to the point of withholding arms sales.
A fist bump between US President Joe Biden and Saudi Crown Prince Mohammed bin Salman


Mr Biden sought to patch things up with a visit to the kingdom in July last year, during which he greeted Crown Prince Mohammed with a fist bump - only for OPEC to push through a production cut of two million barrels per day in October. This was a measure Mr Biden said would have "consequences". So this may be another indication from Riyadh that it has not forgiven, or forgotten, those remarks.

The Saudis are calling the shots


What is not clear is the extent to which Russia - which is not a member of OPEC but is a part of the broader OPEC+ grouping - has had any say in the decision. The Saudis are shouldering the bulk of the production cuts, along with the UAE, Kuwait and Iraq, while Russia's involvement appears to extend to merely keeping in place an existing half a million barrels per day production cut until the end of the year. Moscow stressed on Sunday night that this was a voluntary decision - but very evidently the Saudis are calling the shots in the cartel.

The consequences of this move are clear, though. The most unwelcome one could be a boost to Vladimir Putin's war effort: it is being suggested that less Saudi crude on the market could push the likes of India and China to buy even more Russian crude. The Indians have already indicated as much.

Another is that this production cut will leave global demand and supply out of kilter for the second half of the year. Both Goldman and JP Morgan are now forecasting that crude could trade at $90 a barrel between now and the end of the year. UBS, meanwhile, thinks prices could go to $100.

That will make life harder for central banks around the world that are grappling with the consequences of higher inflation.

This action, then, has increased the danger of interest rates in the UK, Europe and the United States having to remain higher for longer - with all the consequences for global GDP growth that entails.

Newsletter

Related Articles

Hong Kong News
0:00
0:00
Close
It's always the people with the dirty hands pointing their fingers
Paper straws found to contain long-lasting and potentially toxic chemicals - study
FTX's Bankman-Fried headed for jail after judge revokes bail
Blackrock gets half a trillion dollar deal to rebuild Ukraine
Steve Jobs' Son Launches Venture Capital Firm With $200 Million For Cancer Treatments
Google reshuffles Assistant unit, lays off some staffers, to 'supercharge' products with A.I.
End of Viagra? FDA approved a gel against erectile dysfunction
UK sanctions Russians judges over dual British national Kara-Murza's trial
US restricts visa-free travel for Hungarian passport holders because of security concerns
America's First New Nuclear Reactor in Nearly Seven Years Begins Operations
Southeast Asia moves closer to economic unity with new regional payments system
Political leader from South Africa, Julius Malema, led violent racist chants at a massive rally on Saturday
Today Hunter Biden’s best friend and business associate, Devon Archer, testified that Joe Biden met in Georgetown with Russian Moscow Mayor's Wife Yelena Baturina who later paid Hunter Biden $3.5 million in so called “consulting fees”
'I am not your servant': IndiGo crew member, passenger get into row over airline meal
Singapore Carries Out First Execution of a Woman in Two Decades Amid Capital Punishment Debate
Spanish Citizenship Granted to Iranian chess player who removed hijab
US Senate Republican Mitch McConnell freezes up, leaves press conference
Speaker McCarthy says the United States House of Representatives is getting ready to impeach Joe Biden.
San Francisco car crash
This camera man is a genius
3D ad in front of Burj Khalifa
Next level gaming
BMW driver…
Google testing journalism AI. We are doing it already 2 years, and without Google biased propoganda and manipulated censorship
Unlike illegal imigrants coming by boats - US Citizens Will Need Visa To Travel To Europe in 2024
Musk announces Twitter name and logo change to X.com
The politician and the journalist lost control and started fighting on live broadcast.
The future of sports
Unveiling the Black Hole: The Mysterious Fate of EU's Aid to Ukraine
Farewell to a Music Titan: Tony Bennett, Renowned Jazz and Pop Vocalist, Passes Away at 96
Alarming Behavior Among Florida's Sharks Raises Concerns Over Possible Cocaine Exposure
Transgender Exclusion in Miss Italy Stirs Controversy Amidst Changing Global Beauty Pageant Landscape
Joe Biden admitted, in his own words, that he delivered what he promised in exchange for the $10 million bribe he received from the Ukraine Oil Company.
TikTok Takes On Spotify And Apple, Launches Own Music Service
Global Trend: Using Anti-Fake News Laws as Censorship Tools - A Deep Dive into Tunisia's Scenario
Arresting Putin During South African Visit Would Equate to War Declaration, Asserts President Ramaphosa
Hacktivist Collective Anonymous Launches 'Project Disclosure' to Unearth Information on UFOs and ETIs
Typo sends millions of US military emails to Russian ally Mali
Server Arrested For Theft After Refusing To Pay A Table's $100 Restaurant Bill When They Dined & Dashed
The Changing Face of Europe: How Mass Migration is Reshaping the Political Landscape
China Urges EU to Clarify Strategic Partnership Amid Trade Tensions
The Last Pour: Anchor Brewing, America's Pioneer Craft Brewer, Closes After 127 Years
Democracy not: EU's Digital Commissioner Considers Shutting Down Social Media Platforms Amid Social Unrest
Sarah Silverman and Renowned Authors Lodge Copyright Infringement Case Against OpenAI and Meta
Why Do Tech Executives Support Kennedy Jr.?
The New York Times Announces Closure of its Sports Section in Favor of The Athletic
BBC Anchor Huw Edwards Hospitalized Amid Child Sex Abuse Allegations, Family Confirms
Florida Attorney General requests Meta CEO's testimony on company's platforms' alleged facilitation of illicit activities
The Distorted Mirror of actual approval ratings: Examining the True Threat to Democracy Beyond the Persona of Putin
40,000 child slaves in Congo are forced to work in cobalt mines so we can drive electric cars.
×