OPEC Cuts Ignore Washington's Concerns

A Saudi-led decision by oil majors to slash oil production has broader geopolitical implications that signal a deepening rift between Washington and its traditional allies around efforts to contain Russia and concerns about inflation.

In a move that caught markets, and policy makers by surprise, Saudi Arabia, Iraq, the UAE, Kuwait, Algeria and Oman agreed on April 2 to reduce output by more than 1 million barrels per day from May to the end of the year. Saudi Arabia will implement a voluntary cut of 500,000 barrels per day, according to a statement from the country’s Ministry of Energy.

Oil prices jumped the most in almost a year a day after the announcement. Brent crude, the global benchmark, spiked 5.31% to $84.13 a barrel, while WTI, the US benchmark, rose 5.48% to $79.83. Oil prices are still holding above $80 a barrel.

The output cut "will firm prices meaningfully," Dan Pickering, co-founder of the Houston-based firm, said in an interview with Reuters. “We will probably get a $10 (per barrel) move in crude." SPI AM analyst Stephen Innes said: "To the dismay of global leaders, OPEC has decided to draw a hard line at Brent $80 per barrel for self-serving economic interests."

‘Precautionary Measure’

An unidentified Saudi energy official said that the biggest reduction since OPEC+ slashed 2 million barrels a day in October was “a precautionary measure aimed at supporting the stability of the oil market.” The group’s output decision coincided with a Russian decision to extend a cut of 500,000 barrels per day.

“We are seeing many uncertainties – volatile demand, supply, and oil prices, and a reduction of investment in the oil industry,” Russian Deputy Prime Minister Alexander Novak, who co-chaired the 48th meeting of the OPEC+ Joint Ministerial Monitoring Committee, said. “The banking crisis in Europe and the United States is seriously affecting the oil market.”

The cut follows a drop in oil prices triggered by jitters over the banking sector following the collapse of US lender Silicon Valley Bank and UBS's buy-out of troubled rival Credit Suisse, UAE-based oil expert Ibrahim al-Ghitani told AFP. The banking sector’s woes have fueled concerns about a global economic slowdown, which would curb energy demand.

The International Monetary Fund warned on April 11 that the risk of a recession has grown for advanced economies in the wake of bank failures. The IMF projects the global economy will expand at 2.8% this year, slightly lower than its January estimate of 2.9%.

“With the recent increase in financial market volatility and multiple indicators pointing in different directions, the fog around the world economic outlook has thickened,” the international body said in its latest World Economic Outlook. “Uncertainty is high, and the balance of risks has shifted firmly to the downside so long as the financial sector remains unsettled.”

Fighting Washington

The decision to slash output by US allies in the Persian Gulf was made despite Washington’s calls to increase production. The decision will likely be viewed as another sign that US influence among its oil producing allies has declined under the Biden administration, which appears more concerned about its social justice and trangender policies at home than preserving American influence in a region that accounts for 50% of the world’s oil reserves.

“Saudi Arabia’s coldly pragmatic decision this past weekend to cut oil production and raise prices sent a simple message: The United States doesn’t call the shots in the Persian Gulf or the oil market anymore,” David Ignatius wrote in The Washington Post on April 4. “For better or worse, the era of American hegemony in the Middle East is over.”

The decision will also appear to leaders in Western capitals as benefiting Russia’s war effort in Ukraine. The rise in crude oil prices particularly benefits Russia, which "needs oil-money for its expensive war in Ukraine," SEB analyst Bjarne Schieldrop said. The cuts "will tighten up the oil market and thus help Russia to secure better prices for the crude oil it sells", he added.

Last year the Biden Administration said it intended to halt its historic emergency sales of oil from the Strategic Petroleum Reserve, and it would start refilling the 180 million barrels when prices fell to the lower $70s.

And a congressional hearing in early March raised national security concerns when Chairman of the Subcommittee on Economic Growth, Energy Policy, and Regulatory Affairs, Pat Fallon (R-Texas), began to examine the Biden Administration’s decision to deplete the U.S. Strategic Petroleum Reserve (SPR) to historic lows.

“The decisions that led to the largest drawdown of our vital oil in history requires oversight. At its height, the SPR was at 695 million barrels under the previous Administration. It now sits at 371 million barrels, a 47% reduction,” he opened.

Congressional Republicans have long criticized the Biden Administration for its failure to replenish the SPR, blaming high oil prices on the “Putin Price Hike” last year, and neglecting to refill the SPR when oil prices were at annual lows in 2022.

“The Administration sold millions of barrels of our crude to companies controlled by the Chinese Communist Party…So why is President Biden draining our SPR to fill China’s? China has nearly 1 billion barrels of oil in their reserves. We now have just about a third of that,” Fallon closed.

It could also reignite inflation in the US and Europe, influencing central banks’ policies on interest rates. A drop in energy prices has helped cool US inflation, which has fallen from a 40-year peak of 9.1% in June to 6% in February, year over year, according to the Consumer Price Index.

“The Fed sees OPEC decisions as mostly geopolitical, but they can impact production of goods and the transportation of other items, so those higher oil prices can bleed into that core component, which the Fed does tend to focus on a little bit more in terms of setting policy,” Sarah House, senior economist at Wells Fargo, told CNN.