Vladimir Putin has few friends outside Russia. He should therefore offer a hearty bolshoe spasibo to his oil-producing brethren in Opec+. They have heeded his suggestion for sharp production cuts. Wednesday’s Vienna meeting should include a higher than expected 1mn barrel per day reduction to support sagging benchmark crude prices.
Brent bounced 4 per cent on Monday to more than $88 per barrel. But it has fallen over a quarter since peaking in early June.
Opec+ says it is worried about oil market fundamentals. Russia has more to fret about.
Its oil is under sanctions in the west. Indian and Chinese customers are only sopping up Russian production because benchmark Urals crude trades so cheaply, currently about $75 per barrel, according to S&P Platts. That large discount did not exist prior to the Ukraine invasion. For Russia, both price and volumes have fallen year on year.
Production has dropped by 200,000 barrels daily compared with September last year, to about 10.5mn per day, according to Energy Aspects. Russia supplied the world with roughly a tenth of its oil before invading Ukraine.
Unusually, Opec+ is now willing to cede market share to producers outside its cartel, such as international oil companies. That shows that Opec+ is wary about the world economy. In the US, the world’s largest producer and consumer, petrol demand (43 per cent of the total) has slowed. On a monthly average, it is down more than 6 per cent year on year, according to Citi data.
North Sea producers such as Norway’s Equinor should benefit as Opec+ pulls back, especially in supplying Europe. Equinor’s giant 2.7bn barrel offshore oilfield Johan Sverdrup is ramping up output. US and Canadian drillers, most without any Opec country exposure, should gain market share too.
Saudi Arabia may end up sacrificing the most within Opec+ to maintain group harmony. But the real test of the cartel’s consensus has yet to happen. If the oil price downtrend continues, Opec+ will need more cuts in 2023. Stresses within the group would then become intense.
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