OPEC+ agreed its deepest cuts to oil production since the 2020 COVID pandemic at a Vienna meeting on Wednesday, curbing supply in an already tight market despite pressure from the United States and others to pump more.
The cut could spur a recovery in oil prices that have dropped to about $90 from $120 three months ago on fears of a global economic recession, rising U.S. interest rates and a stronger dollar.
The United States had pushed OPEC not to proceed with the cuts, arguing that fundamentals don’t support them, a source familiar with the matter said.
“Higher oil prices, if driven by sizeable production cuts, would likely irritate the Biden Administration ahead of U.S. mid-term elections,” Citi analysts said in a note.
“There could be further political reactions from the U.S., including additional releases of strategic stocks, along with some wildcards including further fostering of a NOPEC bill,” Citi said, referring to a U.S. antitrust bill against OPEC.
JPMorgan also said it expected Washington to put in place counter measures by releasing more oil stocks.
OPEC+ sources said the agreed production cuts of 2 million bpd or 2% of global demand would be made from existing baseline figures.
That means the cuts would be less deep because OPEC+ fell about 3.6 million barrels per day short of its output target in August.
Under-production happened because of Western sanctions on countries such as Russia, Venezuela and Iran and output problems with producers such as Nigeria and Angola.
Goldman Sachs analysts said they estimated the real production cuts would therefore amount to 0.4-0.6 million bpd mainly by Gulf OPEC producers such as Saudi Arabia, Iraq, the United Arab Emirates and Kuwait.
Analysts from Jefferies said they estimated the real cuts at 0.9 million bpd.
Saudi Arabia and other members of OPEC+ – which groups the Organization of the Petroleum Exporting Countries and other producers including Russia – have said they are seeking to prevent volatility rather than to target a particular oil price.
Benchmark Brent crude traded flat at $92 per barrel on Wednesday, after climbing on Tuesday.
The West has accused Russia of weaponising energy, creating a crisis in Europe that could trigger gas and power rationing this winter.
Moscow, meanwhile, accuses the West of weaponising the dollar and financial systems such as SWIFT in retaliation for Russia sending troops into Ukraine in February.
While Saudi Arabia has not condemned Moscow’s actions in Ukraine, U.S. officials have said part of the reason Washington wants lower oil prices is to deprive Moscow of oil revenue.
Relations have been strained between Saudi Arabia and the administration of Biden, who travelled to Riyadh this year but failed to secure any firm cooperation commitments on energy.
“The decision is technical, not political,” United Arab Emirates Energy Minister Suhail al-Mazroui told reporters ahead of the meeting.
“We will not use it as a political organisation,” he said, adding that concerns about a global recession would be one of the key topics.
Russian Deputy Prime Minister Alexander Novak, who was put on the U.S. special designated nationals sanctions list last week, also travelled to Vienna to participate in meetings. Novak is not under EU sanctions.