Saudi Arabia and OPEC+ member Russia grapple with oil output decisions as prices fluctuate
Amid softening oil markets, the Organization of Petroleum Exporting Countries and its allies in OPEC+ are set to meet on November 26 to discuss their next move on the energy chess board. During the meeting, the ministers will be faced with a stark choice: Should they cut supplies further or continue as they are and let the markets take their course?
Both options present difficult choices for oil producers.
Saudi Arabia and Russia – the group’s largest producers – have pledged to keep the voluntary, additional output curbs in place at least until the end of the year, although Russia’s crude exports have risen in recent weeks. Saudi Arabia, Russia, and other members of OPEC+ have already pledged total oil output cuts of 5.16 million barrels per day (bpd), or about five percent of daily global demand, in a series of steps that started in late 2022. The cuts include 3.66 million bpd by OPEC+ and additional voluntary cuts by Saudi Arabia and Russia.
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Despite all these efforts, oil markets continue to be under pressure. Late Friday, oil prices did jump by more than four percent, rebounding from a four-month low hit in the previous session. Yet, as Reuters reported, global oil prices have dropped by almost 20 percent since late September. It has slid to around US$80 a barrel for Brent crude from a 2023 high of near US$98 in September.
Despite the support from OPEC+ for output cuts and an ongoing conflict in the Middle East, concern about demand and a possible surplus next year is pressuring prices.
Cutting the output further won’t be easy for the oil ministers. They have their issues. Most oil producers have a single-product economy. Their income is based on the flow of petrodollars. And if that takes any further hit, it may impact the ambitious plans that major oil producers have carved for themselves.
OPEC kingpin Saudi Arabia is already faced with a squeeze. There is a possibility of its economy contracting even further. The oil-based Saudi economy has posted a considerable budget deficit in the third quarter this year. An eight percent decline in expenditure to about US$78 billion was outpaced by an almost 18 percent decrease in revenues that were US$69 billion, largely due to lower receipts from oil and taxes, Bloomberg reported. The deficit was almost seven times larger than in the previous quarter, as the world’s biggest crude exporter endured a decline in both energy and non-oil income.
This was its biggest contraction since 2020. The kingdom’s cut in its oil production in July, in a bid to push up prices, is largely to be blamed for the budgetary deficit.
In a bid to boost oil revenues, three OPEC+ sources told Reuters last week that OPEC+ is set to consider whether to make additional oil supply cuts when they meet next Sunday. One OPEC+ source, who declined to be named, said the existing curbs might not be enough (to boost prices), and the group will likely analyze whether more could be implemented. Two other OPEC+ sources told Reuters deeper cuts could be discussed.
“All eyes are now back at OPEC+ after the recent fall in oil prices, along with weakening crude curve structures and weakening economic statistics,” Bjarne Schieldrop, chief commodities analyst at SEB AB, told Bloomberg.
It may not be easy for the OPEC+ oil ministers to reach a decision – and for a couple of reasons. The larger picture before the OPEC+ oil ministers remains murky, especially given the rising U.S. output. As per the U.S. Energy Information Agency, the United States is very much on track to set a new annual oil production record in 2023. In each of the two most recent weeks, as well as the average for the past four weeks – covering nearly the whole of October – U.S. output was 13.2 million bpd. That is well above the recently set monthly record from August 2023, as well as the previous record of 13.0 million bpd from November 2019. The rising U.S. output is blunting the output-cut tactics of OPEC+.
Oil producers, on the other hand, require higher oil income to meet their growing expenses. Saudi Arabia, for instance, needs to finance the billion-dollar NEOM project, among many others.
The call before the OPEC+ oil ministers next Sunday is tricky – to say the least.
Toronto-based Rashid Husain Syed is a highly-regarded analyst specializing in energy and politics, with a particular emphasis on the Middle East. Besides his contributions to both local and international newspapers, Rashid frequently lends his expertise as a speaker at global conferences. His insights on global energy matters have been sought after by organizations such as the Department of Energy in Washington and the International Energy Agency in Paris.
For interview requests, click here.
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