OPEC+ heads for deep supply cuts, clash with US

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VIENNA/LONDON- OPEC+ looks set for deep oil output cuts when it meets on Wednesday, curbing supply in an already tight market despite pressure from the United States and other consuming countries to pump more.

The potential OPEC+ cut could spur a recovery in oil prices that have dropped to about $90 from $120 three months ago due to fears of a global economic recession, rising US interest rates and a stronger dollar.

OPEC+, which includes Saudi Arabia and Russia, is working on cuts in excess of 1 million barrels per day, sources told Reuters this week. One OPEC source said on Tuesday the cuts could amount to up to 2 million barrels per day.

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Sources said it remained unclear if reductions could include additional voluntary cuts by members such as Saudi Arabia or if cuts could include existing under-production by the group.

That would be the group’s biggest production cut since demand was smashed by COVID-19 in 2020.

Brent crude rose 11 cents to $91.91 a barrel, after climbing $2.94 in the previous session.

US West Texas Intermediate (WTI) crude CLc1 futures picked up 5 cents to $86.57 a barrel after gaining $2.89 in the previous session.

“A reduction in output on this scale would significantly tighten the market,” ANZ Research analysts said in a note.

OPEC has been under-producing over 3 million bpd and the inclusion of those barrels would dilute the impact of new cuts.

“Higher oil prices, if driven by sizeable production cuts, would likely irritate the Biden Administration ahead of US midterm elections,” Citi analysts said in a note.

“There could be further political reactions from the US, including additional releases of strategic stocks along with some wildcards including further fostering of a NOPEC bill,” Citi said referring to a US anti-trust bill against OPEC.

Saudi Arabia and other members of the Organization of the Petroleum Exporting Countries and allied producers (OPEC+) have said they seek to prevent volatility rather than to target a particular oil price.

The West has accused Russia of weaponizing energy as Europe suffers from a severe energy crisis and may face gas and power rationing this winter in a blow to its industry.

Moscow accuses the West of weaponizing the dollar and financial systems such as SWIFT in retaliation for Russia sending troops into Ukraine in February. The West accuses Moscow of invading Ukraine while Russia calls it a special military operation.

Russia has formed part of the OPEC+ club since 2016. The group has cut and raised output to manage the oil market but has rarely performed cuts when the market is tight.

A significant cut is likely to anger the United States, which has pressured Saudi Arabia to pump more to pressure oil prices and reduce revenue for Russia.

Saudi Arabia has not condemned Moscow’s actions and relations are strained between the kingdom and the administration of US President Joe Biden, who travelled to Riyadh this year but failed to secure any firm cooperation commitments on energy.

The real impact on supply from a lower output target would be limited as several OPEC+ countries are already pumping well below their existing quotas. In August, OPEC+ missed its production target by 3.58 million bpd.

However an agreement on big cuts “would send a strong message that the group is determined to support the market,” ANZ analysts said.

While the market is seen tightening further with European Union sanctions on Russian oil looming in December, the outlook for demand remains clouded by fears of a global recession.

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“The US dollar, global growth concerns and EU sanctions due to take effect on 5 December all remain crucial drivers of oil prices in the short term,” Commonwealth Bank commodities analyst VivekDhar said in a note.

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