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OPEC's Meaningless Production Cuts

By Ellen WaldCommoditiesSep 08, 2022 11:27
uk.investing.com/analysis/opecs-meaningless-production-cuts-200535356
OPEC's Meaningless Production Cuts
By Ellen Wald   |  Sep 08, 2022 11:27
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OPEC+ tried to show its market muscle with its decision to cut production quotas by a negligible 100,000 barrels per day (bpd) in October, moving the price of the Brent benchmark by almost 4% on Monday. (Monday was a holiday in the U.S., so markets there were closed).

OPEC’s point, as stated by Saudi oil minister Abdulaziz bin Salman, was to show “our willingness to use all of the tools in our kit. This simple tweak shows that we are attentive, pre-emptive and proactive in terms of supporting the stability of the market to the benefit of market participants and the industry.”

In the larger global supply-and-demand picture, this cut was meaningless. Last month, OPEC+ increased its production quotas by the same amount, though only a few producing countries have actually increased production so far in September. Not all OPEC+ members were capable of increasing production this month, and thus the quota cut for October will not likely result in a production cut. The market was really reacting to the idea that, in November or December, OPEC+ could make a more significant cut to its production quotas for 2023. If the economic outlook becomes more dismal, OPEC+ may try to head off the kind of abrupt drop in oil prices that we saw during the 2008 recession by giving some support to oil prices preemptively.

Traders should also see OPEC+’s move this week as a show of Russian influence. The insignificant cut pushed the price of Brent up to nearly $97 per barrel in intraday trading. The higher the price of oil, the more power Russia has over Europe. As the deadline (Dec. 5) to implement the European and U.S. sanctions on Russian oil draws closer, Russia has been sending a message to western Europe.

Through OPEC+ and by halting the flow of natural gas through the Nord-Stream I pipeline, Russia is showing the west that Europe needs Russian oil and Russian natural gas more than Russia needs to sell those energy products to Europe.

Europe’s dependency on Russian energy products cannot be overstated. Despite attempts to shift towards other sources of natural gas, Europe will face power shortages on a massive, economically destructive scale this winter, if it does not receive Russian natural gas. To alleviate these issues and remain an industrialized society with a viable economy, European governments will be forced to subsidize electricity costs for their citizens and businesses, which will push them to the brink of insolvency or force them to print more money and risk runaway inflation.

There are several ways this situation could evolve, but one that seems particularly likely is that this situation will push EU politicians to orchestrate a negotiated settlement of their dispute with Russia (centered around the Ukraine conflict) that the EU can tout as a "win." No matter what the EU claims, Putin would also claim a victory. The sanctions would be dropped, the pipelines would reopen, and Europe and Russia would become closer, energy-wise and economically than they were before.

There is always the possibility that North America (specifically the U.S. and Canada) will reverse current policies that stymy the development of their own oil and natural gas production and transportation. However, even if pro-oil and natural gas production policies were implemented tomorrow, enough energy would not make it to Europe in time to forestall significant economic and personal hardship for most.

OPEC's Meaningless Production Cuts
 

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OPEC's Meaningless Production Cuts

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Comments (3)
Humberto Rodriguez
Humberto Rodriguez Sep 08, 2022 13:01
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El recorte fue pequeño , lo importante es que muestra el respaldo a Rusia ...los recortes seguiran, mientras la SPR sigue bajando por politica de Biden para salvar las elecciones despues de Noviembre el petroleo se disparara ...
Roberto Baggio
Roberto Baggio Sep 08, 2022 12:44
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settle europe and putin over ukraine? and this is likely?
migukant parekh
migukant parekh Sep 08, 2022 12:36
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Ellen, the African countries like Ghana,Namibia, Somalia, South Africa etc. hadregistered in oil market,are not shown in thecalculation of oilproduction. OPEC neglect theirexistence.pl. throw light on crudeoilproduction.
 
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