No decision is expected from the meeting of the oil-producing countries to cut production further. Nevertheless, the price of oil is likely to rise in the long term. Russia and Saudi Arabia have different interests.
It was only in April that OPEC+ surprisingly announced a cut in production. After the oil cartel and its partners had already decided in autumn 2022 to cut production by two million barrels per day due to the gloomy economic prospects, the producing countries again reduced the volume by around half a million barrels per day from May.
But despite the reduced supply on the world market, the oil price is weakening. According to analysts, this is mainly due to the fact that China’s economy is growing more slowly than expected and the other major economies are also recovering more slowly.
Higher oil price in Saudi Arabia’s interest
After the OPEC+ announcement in April, prices rose briefly, but since then the price of oil on the futures market has fallen again significantly. At that time, a barrel of the North Sea variety Brent cost more than 86 dollars at its peak, the US light oil variety WTI over 80 dollars per barrel. The price currently oscillates between just over 71 (WTI) and 75 dollars (Brent) per barrel, depending on the variety.
Accordingly, the cut in oil production did not have the effect desired by OPEC+. The Saudi energy ministry said at the time that the “voluntary cut” was intended to stabilize the price of oil.
The question is whether the 23 oil-producing countries, which are meeting in Vienna this weekend for deliberations, will announce another cut in production. That would come as a surprise to observers. Oil market expert Andreas Goldthau from the University of Erfurt says that the fundamental data would not allow the production volume to be cut again. “There is a general expectation that demand will pick up in the second half of the year as economies pick up again. With oil supply capped at the same time, that will push up prices.”
A higher oil price is likely to be in the interests of the largest oil-producing country in OPEC+: Saudi Arabia. According to estimates, the Gulf state needs an oil price of 81 dollars to finance its national budget. Conversely, a further cut in oil production is not in the interest of a second heavyweight among the OPEC+ countries: Russia.
“Russia wants to pump large quantities onto the market”
According to Goldthau, who heads the Geopolitics of Transformation in Energy and Industry group at the Helmholtz-Zentrum Potsdam, Russia currently has an interest in pumping large volumes of oil onto the market, as the country is under pressure due to US and EU sanctions sell below market price. “Russia had a sharp slump at the beginning of the sanctions, but now the route of the supplies has simply changed. Russian oil is no longer going to the EU and the USA, but to India and China,” Goldthau said tagesschau.de.
According to the International Energy Agency’s (IEA) oil market report in May, Russian exports climbed to more than 8 million barrels a day in April, the highest since the war of aggression against Ukraine began. Russia is exporting more oil than agreed at the OPEC+ meeting to finance its war.
Moscow does not seem to be sticking to the announcement that it will cut production by 500,000 barrels a day from March. That, in turn, should not be in Saudi Arabia’s interest. According to a “Handelsblatt” report, Russia is currently taking important market shares in India from the Gulf state. This would give Russia a major incentive to undermine the oil exporters’ agreement.
Apparently difficult OPEC+ meeting
Even if there are very different interests within the group of oil-producing countries, Goldthau believes that it is crucial that Saudi Arabia and Russia come to an agreement. Most recently, the countries had signaled that they were in constructive talks.
The fact that the OPEC+ meeting could be difficult is also shown by the fact that journalists from news agencies such as Reuters and Bloomberg were not invited to report on site after the conclusion of the consultations.