GP Short Notes # 671, 9 April 2023
OPEC: Reducing crude oil production
On 3 April, the 48th Joint Ministerial Monitoring Committee (JMMC) of OPEC members noted additional voluntary production adjustments whereby OPEC+ countries will reduce crude oil production by 1.66 million barrels/day (b/d). As of October 2022, total crude production worldwide was 82 million b/d. Saudi Arabia, which will drive the largest production cut by 500,000 million b/d said that voluntary reduction was a precautionary measure to support the stability of the oil market. As of October 2022, total crude production worldwide was 82 million b/d.
The production cuts come amid the recent statement by the US energy secretary on 24 March when she said that the US could take years to refill its strategic petroleum reserve contrary to what the Biden administration claimed on refilling the reserves soon. A spokesperson for the National Security Council of the Biden administration said: "We don't think cuts are advisable at this moment given market uncertainty - and we've made that clear."
What is the background?
First, the US is seen as an oil price speculator. Owing to the Ukraine-Russia crisis, the US has far released up to 180-million-barrel oil from its strategic petroleum reserve in a coordinated effort among 31 members of the International Energy Agency (IEA). However, that distorted the revenue of OPEC+ members who lost customers. The US is also considering bringing legislation known as NOPEC, which will enable the seizure of OPEC's assets on the US territory if market collusion is proved.
Second, the OPEC unity. During the 1970 oil crisis, the struggle to maintain monopoly was asserted by OPEC countries and this time, the OPEC members united again over sanctions on Russia. Russia, Saudi Arabia and Iraq (all OPEC+ members) are three of the five countries which produce 51 per cent of the total crude oil production in the world. The leverage of OPEC as an oil cartel is crucial for OPEC+ countries to assert their weight in oil pricing dynamics and desire for interdependence on the West.
Third, oil networks and data. According to the OPEC annual report 2021, OPEC produced 55.1 per cent of net annual crude oil production, and 73.2 per cent of the crude oil from OPEC goes to Asia (India and China). According to a Financial Express report, market intelligence firm Kpler was quoted saying that the market share of Asia in buying crude oil from OPEC+ was 61 per cent in 2017. Therefore, the production cuts will induce short-term distortion. However, in the medium term, the prices will stabilize as the oil network is not entirely insinuated to West's version of recovery.
Fourth, the banking Crisis in the West. Following the recent banking crisis in advanced economies, crude oil has fallen below USD 70 per barrel since 2021, and oil rich economies do not want damage to their revenue in current uncertainty. Signs of a recession were perceived strongly contrary to rebound and push from the West.
What does it mean?
First, strategic decoupling of oil markets of OPEC+. Increasing oil production coordination among OPEC+ member countries indicates that West Asia is retrying to use its oil sovereignty to remain a stakeholder in West-led growth rather than remain a victim.
Second, Saudi Arabia and its autonomy: Following reconciliation with Iran, Saudi Arabia is utilizing the scope of diversifying its multi-pronged approach with hegemons. The trend will be utilized by other developing or resource rich countries.
Third, the effects of production cuts will not be the same. The effects might bring more inflation in advanced economies, gazing at an uncertain recovery. Global south countries which have shied away from fully supporting the West version of the Ukraine-Russia crisis will get comfort from the Russian oil buffer. India has already announced cuts in windfall taxes on the sale of oil; this will keep oil marketing companies from going to any loss, and market sentiment will not remain that uncertain.