As OPEC+ ministers prepare to review global oil markets, the group shows no signs of cooling off a rally that has pushed prices close to $100 a barrel.
Crude has soared more than 20% in three months as alliance leaders Saudi Arabia and Russia tighten supplies as global fuel demand hits records. The increase threatens to undermine a fragile global economy, hurt consumers with another inflationary spike and derail plans by central banks to end interest rate hikes.
However, delegates from the Organization of the Petroleum Exporting Countries and its partners do not expect Wednesday’s meeting of the Joint Ministerial Follow-up Committee to recommend any policy changes. UAE Energy Minister Suhail al Mazrouei said on Monday that OPEC+ has “the right policy”.
The high prices are taking a windfall for Saudi Crown Prince Mohammed bin Salman, as his kingdom splashes everything from futuristic cities and international telecommunications deals to top footballers and golfers. They are also a vital source of additional income for President Vladimir Putin as his country wages war in Ukraine.
“The oil market is getting tight and tight, but there are more restrictions to come,” Bob McNally, president of Rapidan Energy Group and a former White House official, told Bloomberg Television. “It all really depends on what Saudi Arabia does.”
Riyadh cut output by 1 million barrels a day in July, deepening earlier cuts made jointly with OPEC+ and bringing output to a two-year low of about 9 million barrels a day. He pledged to maintain this limit until the end of the year. Russia has committed to a more modest reduction in exports of 300,000 barrels per day.
The two OPEC+ leaders said they would review the decision every month, but there is little expectation of changes stemming from this week’s committee meeting. Most OPEC+ members are not participating in the additional production cuts that have pushed prices higher, meaning any adjustments made by the Saudis and Russia tend to be announced in separate statements.
For now, at least, OPEC+ chiefs have reason to keep supply controls in place. Brent crude, the international benchmark, rose to a 10-month high of $97 a barrel last week, but has since fallen to near $90 in London amid concerns about the strength of the global economy.
Drainage tanks
By restricting supplies just as consumption recovers from the pandemic, the cuts are depleting oil inventories around the world at the fastest rate in years. In the US, storage tanks have been drained so low that they may struggle to function properly.
This hurts consumers. India, a major buyer of Saudi and Russian oil, is not comfortable with prices at these levels and foresees some destruction of demand, Pankaj Jain, secretary of the Ministry of Petroleum and Natural Gas, told the conference in ‘Adipec on energy in Abu Dhabi this Monday. . The country continually tells producing nations that crude oil is too expensive, he said.
Last month, Indonesia’s energy chief, Tutuka Ariadji, lamented the “huge burden” of fuel costs in the world’s fourth-most populous country, while US airlines such as Southwest Airlines Co. and United Airlines Holdings Inc., warned passengers to brace for higher jet fuel prices. .
Meanwhile, US policymakers have signaled that interest rates will need to stay higher for longer to contain inflation. There could also be political danger for President Joe Biden as he prepares for next year’s re-election campaign with gas near $4 a gallon.
OPEC+ has offered a mixed rationale for its approach, although it has consistently denied that it is targeting a particular price level.
Secretary-General Haitham Al Ghais said in Abu Dhabi this week that he is “optimistic” about demand, while the UAE’s Mazrouei said the group’s intention is to encourage investment in new supplies. Last month, Saudi Energy Minister Prince Abdulaziz bin Salman called the strategy “proactive” amid uncertainties in the Chinese economy.
If the cartel’s supply squeeze pushes prices above $100 a barrel, the conversation may turn to whether Riyadh would step in to stop the glut in the market. Goldman Sachs Group Inc. expect Saudi Arabia to restore supplies to prevent prices from rising much beyond $105 a barrel, in case that erodes consumption.
Politics can also have some influence on the kingdom. The US, Saudi Arabia and Israel are engaged in complex negotiations in which Washington would offer security guarantees to Riyadh in exchange for normalizing relations with Tel Aviv.
“The White House is working overtime on a mega diplomatic deal with Riyadh and the question is: Where does the energy appear in the bilateral talks?” said Helima Croft, chief commodities strategist at RBC Capital Markets and a former CIA analyst. “Washington’s real game would be a Saudi reduction of its unilateral cut.”
–With the assistance of Ben Bartenstein, Manus Cranny and Dani Burger.
