OPEC+ Shocks With Surprise Output Cut At Delicate Juncture

I’m always amused by references to “assurances” from OPEC or, more recently, OPEC+.

OPEC is, unabashedly, a cartel. And cartels aren’t exactly famous for being trustworthy, which is one reason they’re illegal in more than a few contexts.

Cartels exist for the express purpose of manipulating prices for whatever it is they produce, generally to serve the interests of cartel members. They don’t call it “manipulation,” and sometimes their interests happen to align with the interests of consumers, but everyone knows what’s going on.

In the normal course of business, managing output entails making sure prices aren’t “too low.” It can also mean stepping in to ensure prices aren’t too high, but that’s never an altruistic maneuver — it’s done in the service of guarding against demand destruction or, with respect to OPEC, out of political considerations.

The point is: There are no “assurances” from OPEC, let alone from OPEC+, where the “+” is just a reference to Vladimir Putin. (How’s that for an RSVP “plus-one” you didn’t want? “Hi Jenny! So glad you could make it! Who’s your friend? “Oh, this is Vlad. Vlad, meet Grace.” “Welcome, Vlad. What do you do for a living?”)

With that in mind, the cartel on Sunday announced a production cut that will come to more than one million barrels per day, a move that isn’t likely to be popular at the White House, nor on Capitol Hill.

This was both a shock and not a shock. On one hand, delegates had suggested that no changes were in the offing. On the other hand, oil is near a 15-month low, Abdulaziz bin Salman has a penchant for surprises and Russia is involved.

Six months ago, in what amounted to the naked politicization of the world’s most financialized commodity in a transparent bid to buoy prices ahead of the US midterms, OPEC+ cut output by two million barrels. It was the second slight vis-à-vis Washington in as many months. Sunday’s move makes three insults in less than a year.

The Saudis’ share of the planned reductions will be 500,000 barrels a day. Russia had already announced a similar-sized reduction, which will apparently last through year-end. All in all, the new production cuts will amount to around 1.1 million barrels per day initially. That could eventually be larger (as much as 1.6 million from July) given the extension of the Russian reductions, but there’s some offset from members already producing below quotas (i.e., obviating the need for cuts).

This is highly vexing for the Biden administration, which has resorted to a series of SPR releases to tamp down prices, while berating America’s oil giants for returning cash to shareholders amid record profits.

Saudi Aramco dug up $161 billion in net income last year+, and the Saudi economy is performing well.

The US is resilient (very much so, actually), but the Fed is counting on goods prices not to flare again as policymakers struggle to rein in stubborn core inflation on the services side of the economy.

If oil prices were to rise back into the triple-digits (and stay there), that’d be a blow to the Fed’s inflation-fighting efforts, it’d hamper the Biden administration’s plans to replenish the SPR and it’d just generally be an annoyance, particularly given the extent to which higher prices at US pumps could be leveraged against the White House by Republicans ahead of 2024.

I’ll reserve further judgment until the market has had its say, but this could be remembered as a geopolitical shot across the bow at a very delicate juncture. The Saudis described the move as a “precautionary measure aimed at supporting the stability of the oil market.” Biden won’t describe it that way.

One final word: I’d speculate Beijing was consulted on the move, or at least given a heads-up.