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Oil prices drop as Opec+ cuts compete with recessionary outlook

Oil prices were down two percent Monday, a drop some analysts said vindicated moves by the Saudi and Russian-led group to slash production
Saudi Arabia's Minister of Energy Abdulaziz bin Salman speaks during a press conference after 33rd Opec ministerial meeting in Vienna on 5 October 2022 (AFP)
By MEE staff in New York City

Crude prices were down Monday despite a move by the Saudi and Russian-led Opec+ oil cartel to slash output by two million barrels a day, underscoring the competing economic factors at play as producers look to support prices amid signs of a slowing global economy.

Brent crude, the global oil benchmark, was down two percent Monday to $95.92 a barrel.

Brent had ticked up ahead of the Opec+ decision on Wednesday in anticipation of a cut, climbing from around $84 a barrel the week before to $93.96. Some analysts and commentators said the muted price rises vindicated the cartel’s move.

“Market prices today prove that the Saudi step was correct. Prices have NOT shot up and have in fact stayed in the + or minus $90 band which proves that the market recognized a potential oversupply situation,” Ali Shihabi, a political analyst close to the Saudi government tweeted on Monday.

The US had lobbied hard against cuts and immediately slammed the move, with the White House calling it “shortsighted”.

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The presence of Russia’s deputy prime minister - who is under US sanctions - at last week’s meeting in Vienna crystalised what the US sees as an increasingly cosy relationship between the Kremlin and its Gulf allies. The White House has accused Opec+ of “aligning with Russia”.

Those complaints are likely to amplify this week following an announcement by UAE state news that Emirati  President Sheikh Mohammed bin Zayed Al Nahyan, known as MBZ, will travel to Russia on Tuesday to meet with President Vladimir Putin.

But Saudi Arabia and its allies have defended the production cuts as necessary to support prices amid concerns about a global recession hitting demand. They have chaffed at Washington’s calls for cheaper oil prices, even as the West looks to accelerate a transition away from fossil fuels.

Energy analysts have warned that the cartel’s move risks sending gas prices higher, compounding economic headwinds. 

In the UK, where petrol prices are already above 2008 levels when oil hit a record of almost $150 a barrel, consumer groups are warning of further pain at the pump. 

A spokesman for the Royal Automobile Club (RAC) said that fuel costs would “inevitably” increase due to the impact of reduced oil production. Simon Williams said: “The question is when, and to what extent, retailers choose to pass these increased costs on at their forecourts.”

Gas prices 

So far, however, US gas prices have only marginally ticked up. The national average price of regular gasoline in the US stood at $3.92 a gallon on Monday, up roughly three percent from last week’s average of $3.80 a gallon, according to data from AAA.

To be sure, gas prices are still above their normal averages for this time of year, but a host of factors outside Opec+ are also weighing on the market. US refineries have been dogged by shutdowns for maintenance, while gas demand crept up last month.

The political frenzy over the Opec+ move has also shrouded technical factors that will make the cartel's two million barrel target harder to reach.

Opec+ oil cut: Are Saudi Arabia and UAE testing the limits of a new world order?
Read More »

Most members of the group are already pumping below their quota. The actual amount of oil that will be removed from the market is expected to be about 800,000 bpd.

"OPEC+'s decision... will have a muted impact on the oil supply market as actual output cuts will be smaller,” Fitch ratings said. The financial services company also said that mounting recessionary concerns would dampen demand, even as they warned over geopolitical risk.

Wednesday’s cut is still the largest since 2020 when prices crashed during the pandemic. The burden to slash output now will fall on Saudi Arabia, the United Arab Emirates and Kuwait, analysts say.

In a sign of the difficulties the group faces, a leading Iraqi politician said his country - the second largest crude producer in Opec after Saudi Arabia - couldn’t afford the cuts.

Mohammed al-Sudani, a top candidate for the Iraqi prime minister’s post allied with Iran, told the Wall Street Journal on Monday that if he forms a government he would ask Opec to reassess the share of Iraq’s output within the cartel.

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