OPEC+ looks set for deep oil output cuts when it meets on Wednesday, curbing supply in an already tight market despite pressure from the United States and other consuming countries to pump more.
The potential OPEC+ cut could spur a recovery in oil prices that have dropped to about $90 from $120 three months ago due to fears of a global economic recession, rising U.S. interest rates and a stronger dollar.
OPEC+, which includes Saudi Arabia and Russia, is working on cuts in excess of 1 million barrels per day, sources told Reuters this week. One OPEC source said on Tuesday the cuts could amount to up to 2 million barrels per day.
Sources said it remained unclear if reductions could include additional voluntary cuts by members such as Saudi Arabia or if cuts could include existing under-production by the group.
OPEC has been under-producing over 3 million bpd and the inclusion of those barrels would dilute the impact of new cuts.
“Higher oil prices, if driven by sizable production cuts, would likely irritate the Biden Administration ahead of U.S. midterm elections,” Citi analysts said in a note.
“There could be further political reactions from the U.S., including additional releases of strategic stocks along with some wildcards including further fostering of a NOPEC bill,” Citi said, referring to a U.S. anti-trust bill against OPEC.
Saudi Arabia and other members of the Organization of the Petroleum Exporting Countries and allied producers (OPEC+) have said they seek to prevent volatility rather than to target a particular oil price.
On Tuesday, international benchmark Brent crude rose 3% above $91 per barrel [O/R].
The West has accused Russia of weaponizing energy as Europe suffers from a severe energy crisis and may face gas and power rationing this winter in a blow to its industry.
Moscow accuses the West of weaponizing the dollar and financial systems such as SWIFT in retaliation for Russia sending troops into Ukraine in February. The West accuses Moscow of invading Ukraine while Russia calls it a special military operation.
Russia has formed part of the OPEC+ club since 2016. The group has cut and raised output to manage the oil market but has rarely made cuts when the market is tight.
A significant cut is likely to anger the United States, which has pressured Saudi Arabia to pump more to pressure oil prices and reduce revenue for Russia.
Saudi Arabia has not condemned Moscow’s actions and relations are strained between the kingdom and the administration of U.S. President Joe Biden, who traveled to Riyadh this year but failed to secure any firm cooperation commitments on energy.