As oil prices fall, OPEC+ producers consider further production cuts

FRANKFURT – The big oil-producing countries, led by Saudi Arabia and Russia, are wrestling over whether to cut supplies to the global economy again as the OPEC+ alliance struggles to shore up falling oil prices, which are hurting US motorists were blessings and helped reduce inflation worldwide.

The group of 23 is meeting at OPEC headquarters in Vienna on Sunday after sending mixed signals on possible moves. Saudi Arabia, which is dominant among oil cartel members, has warned speculators they could burn themselves by betting on lower prices. Russia, the leader of the non-OPEC allies, has indicated no change in output is expected.

The decision comes amid uncertainty about when the slow-growing global economy will regain its fuel hunger for travel and industry, and as producers look to oil profits to shore up their coffers.

Oil prices have fallen even after OPEC+ cut output by 2 million barrels a day in October, angering US President Joe Biden by threatening higher gasoline prices a month before the midterm elections. Then, in April, several OPEC members led by the Saudis surprisingly made a cut of 1.16 million barrels a day.

International benchmark Brent crude climbed as high as $87 a barrel but has given back gains after the cut to trade below $75 a barrel for the past few days. US Crude Oil has fallen below $70.

These lower prices have helped US motorists enter the summer travel season. According to the AAA, prices at the pump average $3.55, down $1.02 from a year ago. Falling energy prices also helped push inflation in the 20 European countries that use the euro to their lowest levels since Russia invaded Ukraine.

The US recently replenished its strategic oil reserves – after Biden last year announced the largest national reserve release in American history – an indicator that US officials may be less concerned about OPEC cuts than they have been in recent months.

The Saudis, on the other hand, need sustained high oil revenues to fund ambitious development projects to diversify the country’s economy. The International Monetary Fund estimates that the kingdom needs $80.90 a barrel to meet its planned spending commitments, which include a proposed $500 billion futuristic desert city project called Neom.

That may have been a reason behind Energy Minister Abdulaziz bin Salman’s warning to speculators that if they continue to bet on lower oil prices, they will be “ouch”.

Bin Salman’s scathing comment is not necessarily the prelude to a cut at Sunday’s meeting, said James Swanston, Middle East and North Africa economist at Capital Economics.

“We expect OPEC+ to stick with current production levels,” he said, adding that “there are signs that the government may be willing to live with lower oil prices and persistent budget deficits.”

In addition, current prices could be interesting for Russia as its oil finds eager new buyers in India, China and Turkey. Western sanctions over the war in Ukraine have forced Russian oil to be sold at a discount of around $53-$57 a barrel.

At these prices, Moscow’s supplies avoid triggering the $60 price cap imposed by the Group of Big Seven democracies to limit oil profits going into Russia’s war chest. The price cap allows the world’s third-largest oil producer to continue supplying non-Western customers to avoid a global shortage that would drive up prices for everyone.

Insurers and shipping companies, mostly based in western countries, are not allowed to resell Russian oil if the price is above the cap. Russia has found ways to circumvent the limits through “dark fleet” tankers manipulating transponders that reveal their location or transporting oil from ship to ship to disguise its origin.

An “OPEC+ production cut could push the price of Russian oil above the G7 price cap of $60 per barrel, making it more difficult to transport and thus sell the oil,” Commerzbank commodities analyst Carsten Fritsch wrote in a research note. “Russia seems to be doing good business at current price levels.”

The International Energy Agency said in its April oil market report that Russia had not fully implemented its announcement to extend a voluntary cut of 500,000 barrels a day until the end of the year.

In fact, Russia’s total exports of oil and refined products like diesel fuel rose to their highest level since the invasion of 8.3 million barrels a day in April. And this despite an almost complete boycott by the European Union, formerly Russia’s largest customer.

Analysts say OPEC+ faces conflicting stresses. A cut could support prices or push them higher, with demand expected to pick up later this year.

“The impact of higher oil prices on the global economy will weigh heavily on ministers,” said Jorge Leon, Rystad Energy’s senior vice president of oil market research. “High oil prices would fuel inflation in the West, just as central banks are beginning to see inflation easing gradually.”

“This could prompt central banks to raise interest rates further, which would be detrimental to the global economy and oil demand,” Leon wrote in a research note.

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AP reporter Fatima Hussein contributed from Washington.