How Moscow Benefits from Fresh Oil Production Cuts

Mon Apr 03 2023
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MOSCOW: The shock announcement by several OPEC+ members to voluntarily slash their oil production by over a million barrels per day from next month has sent world oil prices increasing, in a bid widely seen as the tightening of the close bond between Saudi Arabia and Russia.

This is what you require to know about the important decision taken on Sunday by some countries of the Organization of the Petroleum Exporting Countries and their friends.

Why slash oil production further?

Independent of the broader OPEC+ production policy, 8 members of the bloc led by influential Saudi Arabia announced they would slash a further 1.16 million barrels per day of output until the end of the year.

It came after a decision from Russia — also an OPEC+ member — to extend a slash of 500,000 barrels per day.

Unlike two previous slashes, several members opted to act independently on Sunday, without using the formal framework of the group that needs the agreement of the thirteen countries of the OPEC cartel and its eleven partners (OPEC+).

Bjarne Schieldrop, a SEB analyst, said that what is being witnessed is an adaptive OPEC+ group that is able and wants to act ahead of the curve.

Established in 1960, the Vienna-based OPEC group aims to unify and coordinate the petroleum policies of its member states to ensure “fair and stable rates for producers.”

Non-OPEC oil producers in group

To form the OPEC+ group, the organization in 2016 included non-OPEC oil-producing states led by Russia.

Oil rates have suffered greatly from the recent banking crisis in the United States (US) and Europe, with fears of a global financial crisis resurfacing and investors going away from riskier assets like commodities.

Stephen Innes, SPI AM analyst, said that to the disappointment of global leaders, the group has decided to draw a hard line at Brent 80 dollars per barrel for self-serving financial interests.

How will Russia profit from the decision?

Schieldrop said that the rise in crude oil rates especially benefits Russia, which needs oil money for its war in Ukraine.

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Oil market to remain tight

He added that the cuts would tighten up the oil market and thus assist Moscow in securing better rates for the crude oil it sells.

Targeted by a number of Western sanctions over its aggression against Ukraine, Russia has seen its revenues from crude oil exports capped and the markets where it can sell restricted.

According to Schieldrop, the new slashes also confirm “that Moscow is still an important and integral part of the group.”

The effects of Sunday’s decision are all the bigger because, unlike the slashes previously made by the Opec at the height of the pandemic or October 2022, the momentum for global oil demand is high, not low, with a strong recovery of China expected, said Innes.

Prices were immediately impacted after the decision, with the 2 global crude references jumping by about 8 percent in early Monday trading.

The surprise slash further consolidates the Russia-Saudi marriage of convenience by aligning their output levels, thus placing them on equal footing. – AFP

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