This is good news for oil producers, including Russia, and bad news for consumers. Meeting together in Vienna for the first time since March 2020, the thirteen members of the Organization of the Petroleum Exporting Countries (OPEC), led by Saudi Arabia, and their ten partners led by Russia, decided on Wednesday October 5 to reduce their production by two million barrels per day, starting in November.
This amount is twice as high as expected and represents the largest decrease since the spring of 2020 and the start of the pandemic.
By reducing their extraction, the producing countries limit the supply, which could therefore contribute to a recovery in oil prices, while demand weakens, with the slowdown in the world economy. The barrel of Brent in Europe and the WTI in the United States, the two world benchmarks for crude oil, have lost ground in recent weeks, evolving around 90 dollars a barrel, far from the peaks recorded in March at the start of the war in Ukraine, at nearly $140.
Double punishment for Europeans
After OPEC+ announcements, Brent was up more than 2% to $93.6. For Europeans, the impact is all the stronger when the euro is weak against the greenback.
“Expressed in euros, oil prices remain close to their all-time highs”underlines Régis Bégué, director of research at Lazard. “Brent at $93 in 2022 is as expensive for Europeans as a barrel at $147 at the peak of summer 2008.” One euro was then worth 1.6 dollars while the two currencies are at parity today.
Snub for the United States
This decision represents a victory for the line defended by Russia and a snub for the United States, which was pressuring the Gulf states, in particular Saudi Arabia, to maintain the status quo. The US administration does not want oil prices to rise: to deprive Moscow of additional revenue and protect the purchasing power of US households as the midterm elections loom.
In July, US President Joe Biden even visited Saudi Arabia, during a very controversial visit. Without much success. Moreover, he said to himself “disappointed with the short-sighted decision of OPEC +” Wednesday, October 5.
Production already down
But beyond the political considerations, the important thing for the members of the new OPEC + cartel is to avoid a fall in prices, if the threats of recession become clearer. By acting now, it also avoids a build-up of inventories in the event of a slowdown in demand.
In reality, these producing countries are struggling to return to their pre-pandemic level of extraction and remain, for the most part, below their production targets. In August, OPEC + thus missed its target of more than 3.5 million barrels per day, due to a lack of sufficient capacity. In fact, the drastic cut that has just been announced could therefore have less effect than expected.