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The Organization of the Petroleum Exporting Countries and allied producers (OPEC+) has agreed to cut production by two million barrels per day (b/d) in a move driven by geopolitics as well as market fundamentals. Following two years of gradual production increases, OPEC+ has changed tack and is defending against downside risks. The group is also pushing back against efforts by oil-importing states to shape the market, including the proposed price cap on Russian oil and U.S. Strategic Petroleum Reserve (SPR) releases. It is a risky move. Higher oil prices could worsen global economic woes and alienate importing countries, and the U.S.-Saudi relationship will deteriorate.
The cut, agreed at the group’s first in-person meeting in Vienna since Covid-19, was designed to jolt the oil market. There is less to the headline two million b/d cut than meets the eye, which is one reason why the immediate market reaction was limited. The reduction is based on August 2022 production targets—and since many countries continually miss their targets, some of these cuts will exist only on paper. Saudi energy minister Abdulaziz bin Salman estimated that actual cuts could be around 1 to 1.1 million b/d. Real cuts could be even smaller. As usual, the Arab Gulf states will do most of the heavy lifting. Saudi Arabia and the United Arab Emirates (UAE) alone are slated to cut 686,000 b/d beginning in November. Saudi Arabia, with a new target of 10.48 million b/d, will welcome the opportunity to curtail its output after several months of producing at near-record levels. OPEC+ also extended its “Declaration of Cooperation” between core OPEC and non-OPEC states until December 31, 2023.
Russia is the wild card. Its November production target is now 10.48 million b/d—the same as Saudi Arabia—but the combination of European sanctions and a price cap suggest Russia is headed for an involuntary cut. Given the uncertainty over the price cap rules and the level of participation from consuming states, it is hard to estimate the volume impact.
What prompted such a deep cut? Start with the market fundamentals. Oil prices have softened since early summer, and the darkening macroeconomic environment convinced OPEC+ to act. A severe recession is likely in Europe, rising interest rates in the United States are denting the stock market and the housing market, and China’s “zero-Covid” policy is constraining oil demand. OPEC+ has been frustrated that these downside economic risks are dominating sentiment, rather than indications that the market could tighten next year.
Saudi Arabia wants to reorient attention to the physical market. For months, algorithm-driven activity in a thinly traded paper market has amplified price moves. In late August, the Saudi energy minister suggested OPEC+ could cut output to address the volatility he claimed was blurring market fundamentals and undermining stability. The irony, of course, is that Saudi Arabia has traditionally blamed distortions on excessive speculation—too many market players, rather than too few. It is true that the oil market has been volatile this year. But the talk of a gap between the paper and physical market obscured the most important Saudi concern: the oil price was falling.
Beyond the economic rationale for this cut, OPEC+ is attempting to gain the upper hand ahead of Western sanctions against Russia. The group views European and U.S. plans to sanction and impose a price cap on Russian oil exports as a destabilizing force. The proposed price cap faces many challenges and is unlikely to succeed exactly as U.S. Treasury officials hope, but it could cut Russian revenue and create a scramble for cheaper Russian barrels. That could harm other exporters.
EU sanctions on Russia and the proposed price cap are part of a broader trend that worries OPEC+. In the past year, oil-importing countries have sought new ways to influence the market and drive down oil prices. The unprecedented SPR releases by the White House have helped to keep prices in check. The Biden administration has also worked with importing states to coordinate releases of strategic stocks. To be sure, this nascent effort to create a “buyer’s coalition” that could reshape oil market dynamics is a long way off. It would depend on much stronger coordination between the United States, China, and India.
Still, OPEC+ is calling a perceived bluff by the United States and the European Union. It sees a market that is unprepared to absorb a big loss of Russian oil, a non-OPEC industry that has been slow to ramp up production, and Western policymakers that are overly confident in their tools to control the oil market.
This is a risky move by OPEC+. Higher oil prices add yet another economic burden in Europe and will harm importing countries across the world—wealthy and developing countries alike. The cut could strengthen rather than weaken the willingness of China, India, and others to join the Russian oil price cap. (Why not sign on to a deal that could lower your import bill, especially after OPEC+ has tightened supplies?). And higher prices will encourage more non-OPEC production.
The production cut will also cause a major backlash in Washington. Lawmakers are already calling for a reevaluation of the U.S.-Saudi relationship after President Joe Biden’s visit to the kingdom in July failed to produce tangible benefits. The White House has extended planned SPR releases into November, but now suggests it could schedule or bring forward more releases. In a new twist, the White House says it will consult with Congress on “additional tools and authorities to reduce OPEC’s control over energy prices.” This is probably a reference to the long-debated “NOPEC” Act that could open the door to targeting these states for antitrust violations.
In many ways, this decision crystallizes changes that have been emerging for the past decade. The United States is now the world’s largest oil producer, and a less import-dependent Washington is exerting influence in the oil market in ways that could harm the interests of the major exporters. OPEC+ is betting that the United States is overplaying its hand. This is no ordinary production cut. It is a challenge from OPEC+ that will widen the rift between producers and consumers.
Ben Cahill is a senior fellow in the Energy Security and Climate Change Program at the Center for Strategic and International Studies in Washington, D.C.
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