US anger at OPEC+ production cut [GGP]
“If you want a friend, get a dog.” The line, as used by Gordon Gekko in the movie Wall Street, described the life of a successful investor, but it can be readily applied to politics and international relations as well. Countries do not have friends, they have interests, and governments take decisions based on their perceptions of how those interests are best advanced.
Last week’s decision by the OPEC+ countries to cut their headline production limit by 2 million barrels per day provoked some anger in the US, but is entirely understandable when seen through that lens. It is also not as dramatic a move as much of the reaction suggested. The actual production cut is smaller than the headlines imply, and is coming as global demand for oil is faltering. The net impact on the market may be muted.
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The reaction in Washington was certainly noisy enough. Democratic members of Congress proposed retaliatory measures, such as withdrawing US forces from Saudi Arabia and the United Arab Emirates. President Joe Biden said the cut was disappointing, and described it as “unnecessary”. Karine Jean-Pierre, the White House press secretary, said it was “clear OPEC+ is aligning with Russia”.
President Biden visited Saudi Arabia only three months ago, and “reaffirmed the US commitment to help Saudi Arabia protect and defend its territory and people from all external attacks,” the White House said at the time. In the run-up to the OPEC+ meeting, his administration reportedly urged Saudi Arabia to oppose a deep production cut.
Nikki Haley, the Republican former governor of South Carolina and former US ambassador to the UN, suggested the rejection of those appeals had been predictable. “Don't be shocked when OPEC is not your friend and doesn't go and lift and raise production,” she told Fox News. “I mean, they did exactly what I think they wanted to do, which was stick it to Biden.”
Relations between the large oil-consuming countries and the OPEC+ group have been strained recently by the G7’s plan for a cap on the price of Russia’s oil exports. The proposed cap, championed by the US, is a novel policy experiment that seems unlikely to have much success in driving crude prices down. But just the fact that large consuming countries are attempting to cooperate is unwelcome for OPEC+ members. If the price cap does work at all, it could create a model to be used against other producing countries in the future.
Beyond any political tensions and geopolitical strategies, though, the OPEC+ countries had solid reasons to cut production. Brent crude had dropped by about $10 a barrel, from an average of $99.60 a barrel in August to an average of $89.90 in September, as fears grew about the possibility of a global recession. In China, economic growth has slowed sharply, in part because of lockdowns intended to prevent the spread of Covid-19. In the US, UK and the eurozone, central banks have been ramping up interest rates to control inflation. The downside risks to oil demand are significant.
The OPEC+ group’s announcement of a 2 million b/d production cut from November took many by surprise. But it is in reality less aggressive than that headline number suggests. Several members of the group are already producing well below their official maximums, so will not be affected by the new limits. Nigeria, for example, has a new “voluntary” maximum of 1.742 million b/d, but is currently only producing about 1 million b/d. Russia, too, is producing below its new limit of 10.478 million b/d.
There are just four countries carrying the burden of actually cutting production: Saudi Arabia, the United Arab Emirates, Kuwait and Iraq. Together with some small adjustments from a few other countries, the actual reduction will end up being about 1 million b/d.
Meanwhile, global oil demand growth is slowing. World oil consumption is likely to be slightly lower in the fourth quarter of 2022 than in the same period of last year. The net result is that even after the production cuts take effect, global oil inventories will still be growing, at almost as fast a pace as seemed likely before the OPEC+ announcement, according to Wood Mackenzie’s latest Macro Oils report.
Prices did respond to the decision, with Brent rising from about $88 a barrel on the Monday before the OPEC+ meeting to about $98 by the end of the week, but they have subsequently dropped back a bit Ann-Louise Hittle, Wood Mackenzie’s head of Macro Oils, has left her price forecast unchanged: a strengthening during the rest of 2022, with Brent to average $97 per barrel in October, rising to an average of $103 per barrel for December
While the market impacts of the OPEC+ move are likely to be contained, the political consequences could be more lasting. Senator Charles Schumer, the Democratic leader in the Senate, said they were “looking at all the legislative tools to best deal with this appalling and deeply cynical action, including the NOPEC bill.”
Senator Bob Menendez, chair of the Senate foreign relations committee, said the Biden administration should immediately “freeze all aspects of our cooperation with Saudi Arabia, including any arms sales and security cooperation beyond what is absolutely necessary to defend US personnel and interests.”
However, there is a good chance that this rhetoric will also amount to very little in the end. Some version of the NOPEC legislation, which would bring the OPEC+ group under the remit of US antitrust law, has been brought to Congress many times over the past 22 years, but has never made it into the statute book.
President George W. Bush strongly opposed NOPEC legislation, and threatened to veto it, on the grounds that it would “result in a targeting of foreign direct investment in the United States as a source of damage awards and would likely spur retaliatory action against American interests in those countries and lead to a reduction in oil available to US refiners.”
It would also create an even wider breach in the relationship with Saudi Arabia, which has been a key focus for US foreign policy since the 1940s. The two countries share many aims in common, not least the preservation of a stable international trading system for oil. Although tempers may be frayed and feelings running hot in Washington DC at the moment, it is the cooler calculations of long-term US interests that are likely to prevail.
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