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The meeting of oil-producing countries is not expected to make a decision on further production cuts. Still, oil prices are likely to rise in the long run. Russia and Saudi Arabia have different interests.
It wasn’t until April that OPEC+ unexpectedly announced production cuts. The oil cartel and its partners had already decided to cut production by 2 million barrels per day in the fall of 2022 due to the gloomy economic outlook, after which producers cut production again by about 500,000 barrels per day starting in May.
But oil prices have weakened despite reduced supply on world markets. Analysts believe that this is mainly due to the lower-than-expected economic growth in China and slower recovery in other major economies.
Rising oil prices are in Saudi Arabia’s interest
Prices rose briefly after the OPEC+ announcement in April, but oil prices have fallen sharply again in futures markets since then. At that time, the price of Brent crude oil in the North Sea was more than 86 US dollars per barrel at its peak, and WTI was more than 80 US dollars per barrel in the US light oil variety. The current price is between slightly higher than 71 US dollars (WTI) and 75 US dollars (Brent). Fluctuates per barrel, depending on variety.
Therefore, oil production cuts have not achieved the desired effect of OPEC+. The Saudi Energy Ministry said at the time that the “voluntary production cuts” were aimed at stabilizing oil prices.
The question is whether the 23 producers meeting this weekend in Vienna will announce another cut. This will surprise observers. Andreas Godsow, an oil market expert from the University of Erfurt, said the fundamental data did not allow for another production cut. “Demand is widely expected to pick up in the second half of the year as the economy picks up again. At the same time oil supplies are constrained, which will push prices higher.”
Higher oil prices may be in the interest of OPEC+ top producer Saudi Arabia. The Gulf state needs an oil price of $81 to fund its state budget, according to estimates. Conversely, cutting oil production further is not in the interests of the second heavyweight among the OPEC+ nations: Russia.
“Russia wants to put a lot on the market”
Goldthau, head of the energy and industrial transition geopolitics group at Helmholtz-Zentrum Potsdam, said Russia was now interested in putting a lot of oil on the market as the country came under pressure from U.S. and European Union sanctions. below market price. “Russia fell sharply when the sanctions started, but now the supply routes have changed. Russian oil is no longer going to the EU and the U.S., but to India and China,” Goldthau said tagesschau.de.
According to the International Energy Agency’s (IEA) oil market report for May, Russia’s exports climbed to more than 8 million barrels a day in April, the highest level since its war of aggression against Ukraine began. Russia is exporting more oil than agreed at the OPEC+ meeting to finance its war.
Moscow did not appear to be sticking to its statement that it would cut output by 500,000 barrels per day starting in March. This, in turn, should not be in Saudi Arabia’s interest. According to the “Handelsblatt” report, Russia is currently taking a significant market share from India from the Gulf country. That would give Russia a major incentive to break deals with oil exporters.
A clearly tough OPEC+ meeting
Even with starkly different interests within the oil-producing bloc, Goldthau sees a deal between Saudi Arabia and Russia as crucial. Recently, the countries have indicated that they are in constructive talks.
The OPEC+ meeting could be tough, also reflected in the fact that journalists from news organizations such as Reuters and Bloomberg were not invited to report after the talks.