Oil supplies could face further cutbacks in coming months when a European ban on most Russian imports takes effect in December.
The Opec+ alliance of oil-exporting countries on Wednesday decided to sharply cut production to support sagging oil prices.
Energy ministers meeting at the Vienna headquarters of the Opec+ oil group cut production by 2 million barrels per day starting in November at their first face-to-face meeting since the start of the COVID-19 pandemic.
Besides a token trim in oil production last month, the major cut is an abrupt turnaround from months of restoring deep cuts made during the depths of the pandemic and could help alliance member Russia weather a looming European ban on oil imports.
In a statement, Opec+ said the decision was based on the “uncertainty that surrounds the global economic and oil market outlooks.”
The impact of the production cut on oil prices – and thus the price of gasoline made from crude – will be limited somewhat because Opec+ members are already unable to meet the quotas set by the group.
The alliance also said it was renewing its cooperation between members of the Opec and non-members, the most significant of which is Russia. The deal was to expire at year’s end.
The decision comes as oil trades well below its summer peaks because of fears that major global economies such as the US or Europe will sink into recession due to high inflation, rising interest rates meant to curb rising consumer prices, and uncertainty over Russia’s war against in Ukraine. The cut could spur a recovery in oil prices that have dropped to about $90 from $120 three months ago on fears of a global economic recession, rising US interest rates and a stronger dollar.
The fall in oil prices has been a boon to US drivers, who saw lower gasoline prices at the pump before costs recently started ticking up, and for US President Joe Biden as his Democratic Party gears up for congressional elections next month.
White House press secretary Karine Jean-Pierre told reporters Tuesday that the US would not extend releases from its strategic reserve to increase global supplies.
Biden has tried to receive credit for gasoline prices falling from their average June peak of $5.02 – with administration officials highlighting a late March announcement that a million barrels a day would be released from the strategic reserve for six months. High inflation is a fundamental drag on Biden’s approval and has dampened Democrats’ chances in the midterm elections.
Oil supply could face further cutbacks in coming months when a European ban on most Russian imports takes effect in December. A separate move by the U.S. and other members of the Group of Seven wealthy democracies to impose a price cap on Russian oil could reduce supply if Russia retaliates by refusing to ship to countries and companies that observe the cap.
The EU agreed Wednesday on new sanctions that are expected to include a price cap on Russian oil.
Russia “will need to find new buyers for its oil when the EU embargo comes into force in early December and will presumably have to make further price concessions to do so,” analysts at Commerzbank wrote in a note. “Higher prices beforehand – boosted by production cuts elsewhere – would therefore doubtless be very welcome.”
Dwindling prospects for a diplomatic deal to limit Iran’s nuclear program have also lowered prospects for a return of as much as 1.5 million barrels a day in Iranian oil to the market if sanctions are removed.
Oil rose on Wednesday, building on gains in recent days as Opec+ agreed its deepest cuts to production since the 2020 COVID pandemic, despite a tight market and opposition to cuts from the United States and others.
Brent crude was up 28 cents, or 0.3%, at $92.08 a barrel at 1351 GMT, while US West Texas Intermediate (WTI) crude rose 7 cents, or 0.1%, to $86.59 a barrel. Both contracts rose sharply in the last two days. The cut could spur a recovery in oil prices that have dropped to about $90 from $120 three months ago on fears of a global economic recession, rising US interest rates and a stronger dollar.
Oil had been rising this week in anticipation of the cuts, said Fiona Cincotta, senior financial markets analyst at City Index.
“The real impact of a large cut would be smaller, given that some of the members are failing to reach their output quotas,” Cincotta added.
In August, OPEC+ missed its production target by 3.58 million bpd as several countries were already pumping well below their existing quotas.
“We believe new output targets will mostly be shouldered by core Middle East countries, led by Saudi Arabia, the UAE and Kuwait,” said Rystad Energy’s analyst Jorge Leon.
The United States was pressing Opec+ producers to avoid making deep cuts, a source familiar with the matter told Reuters, as President Joe Biden looks to prevent a rise in U.S. gasoline prices ahead of midterm congressional elections on Nov. 8.
Biden has been grappling with gasoline prices all year and after a spike, they have eased, something his administration has touted as a major accomplishment.