OPEC+, the cartel of the Saudi-led Organization of the Petroleum Exporting Countries plus Russia and a few others, had scheduled a virtual meeting for April 3. On March 28, Bloomberg reported that “OPEC+ shows no sign of changing oil output at a meeting next week.” Well, guess what? On April 2, Saudi Arabia announced a “voluntary cut of 500,000 barrels per day [about 5 percent of its production] in coordination with some other OPEC and non-OPEC countries.” The total being taken off the market is more than 1 million b/d.
The energy world was aghast/shocked/surprised/embarrassed by the news and their collective inability to predict it. (I award myself a small pat on the back for noticing, and saving, the Bloomberg story and thinking: “Ho hum, that’s a hostage to fortune.”)
The decision to cut production has both political and economic dimensions — and perhaps, consequences. As the Financial Times noted in the explanation of its story, which quickly led its website: “Initiative to boost prices shows Saudi Arabia’s determination to pursue different energy strategy to Washington.” So, we are in for another round or two of Crown Prince Mohammed bin Salman (MbS) versus President Biden stories.
The economic aspect probably will show itself in the financial markets. Oil prices have weakened during the dramas involving the collapse of Silicon Valley Bank and the acquisition of Credit Suisse by UBS. Cuts in production probably means increased oil prices, which could result in slower growth/recovery. Today the widely traded Brent variant leapt more than 6 percent to the mid-$80s.
This quickly leads to a possible angle involving China. MbS’s developing closeness to President Xi Jinping — especially since MbS hosted the Chinese leader late last year and further deepened their relationship with the recent announcement of possible Iran-Saudi normalization, brokered by Beijing — may be at odds with higher oil prices. Unlike Russia, which is a major producer and exporter in its own right (although less so following sanctions incurred by its invasion of Ukraine), China is a major importer of oil. A price increase may adversely impact the bid to revive its economy post-COVID.
Russia has agreed to extend until the end of the year its own 500,000 b/d production cut announced last month. Other countries involved in production cuts are Iraq, the United Arab Emirates (UAE), Kuwait, Kazakhstan, Algeria and Oman.
The immediate reaction of the Biden administration, quoted by Reuters, was that the cuts were not advisable: “We don’t think cuts are advisable at this moment given market uncertainty — and we have made that clear,” a spokesperson for the National Security Council said. In a written statement, which suggests frustration more than threats, the NSC said: “We will continue to work with all producers and consumers to ensure energy markets support economic growth and lower prices for American consumers.”
The impact on prices at the pump could mean, according to an expert quoted by The Associated Press, gasoline costing more than $4 per gallon during the summer driving season. The implied bonus that motorists have received in recent months, as prices have weakened, isn’t being mentioned.
The oil production cutbacks and their impact could dominate financial news over the next few days. There will also be a “blame game.” What prompted Saudi Arabia to lead this action? Reasons mentioned so far are the U.S. holding off on refilling the Strategic Petroleum Reserve, and thereby not boosting demand, and the Saudi oil minister, Prince Abdulaziz bin Salman, MbS’s older half-brother, being irritated by short sellers making money.
Perhaps we will never know, but one hopes that the U.S. intelligence community picked up all the diplomatic chatter between the oil producers even if energy analysts and the news media didn’t.
Simon Henderson is the Baker Fellow and director of the Bernstein Program on Gulf and Energy Policy at the Washington Institute for Near East Policy. Follow him on Twitter @shendersongulf.