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Saudi Surprise Cut Signals OPEC+ Crisis

  • Saudi Arabia surprised the markets with another 1 million bpd voluntary production cut.
  • Key OPEC members including the UAE and African nations were unhappy to see the current cuts extended into 2024.
  • Russia is unlikely to comply with production cuts as it looks to optimize oil revenues to finance its war in Ukraine.

Following a suspense-filled weekend in Vienna, where OPEC oil ministers attempted to downplay media attention, global oil markets remain uncertain about the direction of oil prices. The recent "surprise" oil production cut announced by Saudi Arabia's Minister of Energy, Prince Abdelaziz bin Salman, has failed to restore confidence in the increasingly fragile OPEC+ alliance. Pressured by his own remarks and attempts to limit coverage by critical reporters, OPEC's leading member had no choice but to bear the burden of yet another production cut. Many analysts expected OPEC+ to extend the existing cuts, while neglecting the real underlying issue. The lack of transparency from Russia regarding its oil production and exports, coupled with Moscow's refusal to discuss potential new cuts, has placed a strain on the OPEC+ alliance. While all members have managed to mitigate the damage temporarily, the outcomes and statements suggest a scorching summer ahead. Diverting attention to 2024 deflects from the pressing concerns at hand.

Over the past week, global oil markets have been dominated by the statements of Saudi Energy Minister Prince Abdelaziz bin Salman, particularly his comments on short sellers during a summit in Doha, Qatar. These remarks sparked optimism among bullish traders, who interpreted them as a signal of potential production cuts. However, Prince Abdelaziz's stance on critical journalism, particularly with renowned media outlets like Bloomberg, exposed the fragile internal cohesion within OPEC. Russian Energy Minister Novak's statement that there is no need for additional cuts further aggravated Saudi concerns, undermining any prospects of genuine cooperation between the two parties and leaving the OPEC+ alliance hanging by a thread. Related: ExxonMobil: New Fracking Technology Can Double Oil Output

Simultaneously, other key OPEC members, notably the UAE and various African nations, have been pushing in the opposite direction. Abu Dhabi, having made substantial investments in its upstream sector, is seeking ways to capitalize on its increased production capacity in the coming years. OPEC's current production cuts hinder this objective, as future volume increases will be restricted. Similarly, African members like Nigeria and Angola find themselves in a similar position, with their current production volumes not aligning with their nominal production capacities. OPEC's move to reassess African quotas based on their actual production levels is perceived as a direct threat to their future prospects.

The dynamics within OPEC are fraught with tensions, as conflicting interests and divergent objectives strain the alliance. The delicate balance between short sellers, critical journalism, production cuts, and individual member ambitions has pushed OPEC to the brink, jeopardizing its future stability.

Although Saudi Prince Abdulaziz expressed trust in Russia's commitment to the production cuts in a recent interview, emphasizing the need to "trust but verify" with the assistance of secondary sources, this statement should not be underestimated. Russia’s current production and export strategy starkly contradicts the existing agreement. It is evident that Moscow is unwilling to curtail its exports, as it requires substantial funds to fund its war in Ukraine, all the while witnessing a gradual erosion of its regional power base. Financing is crucial for the survival of Putin's regime, particularly in the light of the potential offensive by Ukraine's armed forces to push back Russian troops in the occupied territories. 

Until now, Saudi Arabia has remained committed to sustaining the pro-Russian cooperation within OPEC+, but it is becoming increasingly apparent that Riyadh is slowly realizing the limitations imposed upon itself by aligning closely with Putin's interests. The implications of this association are being recognized by Saudi Arabia, highlighting the constraints it has placed on its own decision-making and strategic maneuverability.

Another major concern is the increasingly difficult oil market cooperation between Saudi Arabia and the United Arab Emirates (UAE). While speculations about the UAE leaving OPEC remain unfounded, internal tensions within the alliance are apparent. UAE's Energy Minister, Suhail, stated that Abu Dhabi will extend its voluntary cut of 144,000 bpd until the end of December 2024, as a precautionary measure in coordination with other participating countries in the OPEC+ agreement. He reiterated that this cut would be from the required production level agreed upon at the thirty-fifth ministerial meeting of OPEC+ on June 4, 2023. It is essential to view this statement as a diplomatic gesture towards Saudi Arabia, rather than openly questioning the UAE's commitment to cooperation.

However, in reality, this voluntary cut is minimal and places extreme pressure on the leadership in Abu Dhabi to navigate a challenging path. Sustaining the cuts until the end of 2024 is unrealistic, both for OPEC and global oil supply. Undoubtedly, there will be an increase in demand in 2023, even if the anticipated 800,000 bpd demand increase from China falls short of expectations.

The UAE’s balancing act poses significant challenges. The sustainability of the extended cuts and the broader cohesion within OPEC remain uncertain amidst shifting market dynamics and divergent objectives among member countries. 

In the short term, some upward price movements will be seen. A cut normally always has some bullish impact. However, when the bearish narrative of recession fears reemerges, the sentiment in oil markets could turn sour once again. 

Overall, the risk for the oil market cannot be underestimated. Instability within OPEC+ bad news. Saudi Arabia needed to put its money where its mouth was last week, but forgot that the reactions from its OPEC peers might not be positive at all, and that additional cuts do not necessarily guarantee higher oil revenues. The escalating crisis between Saudi Arabia and Russia has now become apparent for all to see. What was once dubbed an "unholy alliance" by some has unraveled due to Moscow's increasing desperation for cash and geopolitical influence, which no longer aligns with the interests of the other parties involved. Prince Abdulaziz will soon find himself in a position where he must address his own brother, Crown Prince Mohammed bin Salman, and explain why the current course of action will fail to generate additional revenues. The success of Saudi Vision 2030 is pivotal, not only for the stability of crude oil prices but also for the future trajectory of Crown Prince Mohammed bin Salman himself.

This uncertainty may bring the return of the more self-centered production policies, such as we’ve seen in 2020. If some OPEC+ members will decide to unilaterally increase their own export volumes, this may upset other OPEC+ members which could opt to do the same, causing oil prices to plunge as a result. 

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By Cyril Widdershoven for Oilprice.com

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  • Mamdouh Salameh on June 06 2023 said:
    OPEC+ took the right and only decision available to it in the current circumstances by refraining from any new production cuts while extending existing ones to the end of 2024.

    The decision was taken purely on economic grounds since new cuts would have had no effect on pushing oil prices up since the decline in prices over the last three months has nothing to do with the fundamentals of the market which remain robust and everything to do with persistent fears of a banking or financial crisis triggered by a shaky US banking system. In such circumstances making new cuts would have been barrels down the drain and could have caused some dissent from other members particularly the UAE, Nigeria and other African members.

    Only when these fears disappear altogether from the market will we see prices recover their losses and surge towards $90-$100.

    Meanwhile, The Saudi voluntary cut was unnecessary with hardly any impact on prices. There were two major motives behind it. The first is that the Saudi Energy Minister Prince Abdulaziz bin Salman has boxed himself in a corner having threatened speculators and short sellers with action so he decided to give teeth to his threat and go ahead with it to maintain credibility.
    However, I tend to believe that there was another motive behind the Saudi cut. It is to hide the fact that Saudi oil production has been on the decline for years to around 6.0-6.5 million barrels a day (mbd).With average consumption this year at 3.60 mbd, the Saudis can realistically export only 2.4-2.9 mbd. To be able to export 6.0-6.5 mbd, they have had to draw an estimated 3.6 mbd from their oil inventory. The cut for one month enables them to replenish their oil inventory by 31 million barrels in July.

    And contrary to Western disinformation, cooperation between Saudi Arabia and Russia continues to be the backbone of OPEC+. But we should also remember that they are also rivals being the world’s largest exporters of crude.

    Dr Mamdouh G Salameh
    International Oil Economist
    Global Energy Expert

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