Washington sees OPEC+’s decision to slash oil production by more than 2 million barrels a day as political interference and a “blow” against U.S. President Joe Biden, said Dan Yergin, vice chair of S&P Global.
On Wednesday, the group of some of the world’s most powerful oil producers agreed to impose deep output cuts to shore up crude prices despite calls from the U.S. to pump more to help the global economy.
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“This is seen as, first of all, a blow against Biden who came to Saudi Arabia. Secondly, it’s seen as somehow political interfering in the U.S. election, although the cut doesn’t go into effect until November.”
The decision, which was made at OPEC and OPEC+’s first in-person meeting in Vienna since 2020, would mark the biggest cut since the pandemic began.
Biden visited the Saudi government in July in a bid to ramp up oil production and control soaring energy prices.
Oil prices rose to a three-week high on Wednesday after the announcement following three days of rallying. The West Texas Intermediate climbed 1.4% to $87.76 per barrel, while the Brent crude rose 1.7% to $93.37 a barrel in early trade.
Oil as a weapon
“The OPEC+ might find itself against the West with weaponized oil,” said Vishnu Varathan, head of economics and strategy at Mizuho Bank, in a note.
He wrote that the oil supply cuts are “seen partly as a protestation of Russian oil price caps” and confirms the organization’s “naked desire for price buoyancy, not just support.”
A production cut of around a million barrels a day would have led to price gains without compromising on volume, but the larger reduction shows the group’s “disregard for the economic woes of, and geo-political alignment with, global partners,” Varathan added.
Yergin, likewise, said the agreement is seen “not in economic terms” but as being more political in nature.
The decision also comes as the EU reached an agreement on capping Russian oil prices as part of a new sanctions package.
“The Russians have signaled in this case and other cases that they are going to do everything they can to frustrate a price cap on oil,” Yergin said.
“There seems to be a mini battle between [Strategic Petroleum Reserve] releases in the White House and what’s going on with OPEC+,” said Bill Perkins, CEO of Skylar Capital Management.
“In the end, OPEC+ is going to win that battle, the SPR will eventually run out of food it can withdraw. So that’s a dangerous game that we’re playing there,” he said.
A few weeks ago, the U.S. Energy Department announced it would sell up to 10 million barrels of oil from the SPR for delivery in November.
Perkins added that the point that the group wants to make is that price signals from the markets aren’t enough to “induce the investment or the supply response” that it needs.
Global oil prices skyrocketed to more than $120 per barrel after the Russian-Ukraine war broke out, but have tapered to slightly above $80 per barrel in the week before OPEC+’s decision to slash production.
However, when asked if the alliance’s decision would encourage moreinvestment in crude oil production and infrastructure, Perkins struck a cautious note.
“It’s a good bet, but it’s a scary world right now,” he said.
“People might feel a little bit more brave to brave the macro economic headwinds … That being said, if there’s a giant recession, energy demand is one of the first things to go.”