OPEC Slashes Oil Output Weeks After Biden’s Fist Bump With Saudi Crown Prince

A 3D-printed oil pump jack is seen in front of the OPEC logo in this illustration picture, on April 14, 2020. (Dado Ruvic/Reuters)

Crude futures rallied on Sept. 5 after the Organization of the Petroleum Exporting Countries (OPEC) and its oil-producing allies, OPEC+, agreed to trim their production levels amid growing global recession fears.

The cartel plans to reduce output targets by approximately 100,000 barrels per day (bpd) beginning in October.

Officials said it was necessary to stabilize market conditions and facilitate “efficient function” amid the “adverse impact of volatility and the decline in liquidity on the current oil market.” OPEC noted that uncertainty would force “continuous assessment of market conditions,” and a meeting could be called at any time.

The next meeting is officially scheduled for Oct. 5.

October West Texas Intermediate (WTI) crude oil futures rose by more than 3 percent to about $90 per barrel on the New York Mercantile Exchange. November Brent crude futures surged by more than 4 percent, to about $97 per barrel, on London’s Intercontinental Exchange Futures trading platform.

At a time when the world is contending with an energy crisis and soaring inflation, OPEC’s cuts are “terrible news,” according to Ipek Ozkardeskaya, a senior analyst at Swissquote Bank.

The cuts come weeks after U.S. President Joe Biden and Saudi Crown Prince Mohammed bin Salman engaged in a fist bump ahead of a much-anticipated summit between the two leaders. The meeting resulted in Riyadh agreeing to expand capacity by a tepid 100,000 bpd, one of the smallest production increases in the kingdom’s history. OPEC’s decision effectively reversed Saudi Arabia’s move this summer.

Weaker Global Demand

Since the July meeting between Biden and the crown prince, OPEC’s energy demand outlook has turned lower. According to its monthly report in August, the group projected that 2022 oil consumption would increase by 3.1 million bpd, or 3.2 percent. This is down by 260,000 bpd from the previous projection. It also cut its 2022 and 2023 global economic growth forecasts to 3.1 percent

Saudi Crown Prince Mohammed bin Salman (R) greets U.S. President Joe Biden with a fist bump after his arrival in Jeddah, Saudi Arabia, on July 15, 2022. (Bandar Aljaloud/Saudi Royal Palace via AP)

“Global oil market fundamentals continued their strong recovery to pre-COVID-19 levels for most of the first half of 2022, albeit signs of slowing growth in the world economy and oil demand have emerged,” OPEC said in its report (pdf). “This is, however, still solid growth, when compared with pre-pandemic growth levels. Therefore, it is obvious that significant downside risk prevails.”

This was in contrast with the International Energy Agency, which increased its demand outlook by 380,000 bpd in August.

Investors had widely expected that OPEC would begin easing production efforts after Saudi Energy Minister Prince Abdulaziz bin Salman Al Saud told Bloomberg last month that there was an increasing disconnect between the “paper and physical markets” for crude. He described the international oil market as being in “a state of schizophrenia.”

“The paper and physical markets are becoming more and more disconnected. In a sense, the market is in a state of schizophrenia, and this creates a kind of yo-yo market and sends the wrong signals at a time when more transparency and clarity and well-functioning markets are needed more than ever to enable participants to effectively mitigate risk and manage them and the uncertainty they face,” the energy minister said.

What About Iran?

This summer, crude oil prices have plummeted partly on speculation that Iran and the West could be on the cusp of reaching a nuclear agreement, subsequently allowing Tehran to contribute approximately 1 million bpd to worldwide markets.

Brian Kessens, senior portfolio manager and managing director at Tortoise, said in a recent podcast that prices have slumped on the news that the United States and Iran “are closer to a deal now than at any other time during the Biden administration.”

“While a deal could add 1 million bpd to the global oil market, Saudi Arabia and other OPEC member nations quickly reminded everyone that they’ll have the last word, offering thoughts that they would consider reducing oil production to stabilize the market,” Kessens said. “The implication is production cuts would potentially coincide with a return of Iranian oil to global markets. Geopolitics at its best.”

But if the West wanted to offset OPEC’s latest move, Washington and Europe would need to ink a nuclear deal soon, according to Ozkardeskaya.

“What the United States could do, however, is to strike the nuclear deal with Iran,” Ozkardeskaya told The Epoch Times. “The probability of the U.S.–Iran nuclear deal will likely keep the upside in crude limited. But in the short run, the OPEC decision will likely tilt the market balance to the upside and pressure the price of a barrel toward the $100 per barrel.”

However, deliberations between Washington and Tehran have been volatile. The Iranian regime has denied suggestions from anonymous U.S. and European officials that negotiations have been “negative.”

Iranian Foreign Ministry spokesman Nasser Kanani told reporters on Sept. 5 that it wants to achieve a favorable outcome to the marathon of nuclear discussions.

“We believe Iran’s response has been constructive, transparent, and legal and can create the grounds for a conclusion of the talks and for an agreement in a short amount of time if there is also mutual political will,” Kanani said. “Either way, lifting sanctions and [providing] economic benefits for the Iranian nation ... are among our top goals.”

Will Oil Prices Soar Again?

Wall Street’s expectations for crude oil prices have been mixed.

In August, British bank Barclays reduced its Brent price forecasts by $8 per barrel for 2022 and 2023. The financial institution sees Brent, the international benchmark for oil prices, averaging $103 this year and next. Analysts also think WTI will average roughly $99 for both years.

Goldman Sachs turned bullish on crude oil, with Damien Courvalin, head of energy research, telling Bloomberg that Brent could spike to $130 by the end of the year.

“We think that’s the level at which we need to see sustained pricing to eventually solve the market deficit,” Courvalin said. “We’re still in deficit. Despite growth slowing, prices still have work to do, and that’s higher from here.”

The investment bank also projected in a research note that U.S. retail gasoline prices could rebound to $4.35 per gallon by the year’s end.

“We forecast that U.S. retail fuel prices will rally into year-end, then decline from second quarter 2023 onward, as refining and marketing margins start to normalize,” Goldman Sachs wrote in a note.

Since peaking at more than $5 in early June, the national average for a gallon of gas has tumbled by about 25 percent to $3.78, according to AAA. A gallon of diesel remains at more than $5.