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OPEC+ will make a decision to reduce production this week. It is reported that the organization may reduce production by 1 million barrels per day.
It is reported that Saudi Arabia agreed to cut production because the country hopes to protect idle capacity for long-term.
Although OPEC has claimed to be satisfied with the oil price of $60-70 per barrel, the organization has raised its target oil price in combination with various influencing factors.
Last week, as oil prices fell sharply in the past three months, it was reported that OPEC+ may consider cutting production.
Initially, it was reported that Russia first came up with the idea, with the goal of cutting production by 1 million barrels per day. Subsequently, a source said that OPEC+ is preparing to further reduce production.
Some people do not agree with the statement that OPEC+ and OPEC jointly reduced production. After all, OPEC alone has lost more than one million barrels of daily production target in a few months. According to production data, Russia's oil production has also dropped by more than 1 million barrels per day.
In this case, the upcoming production cuts and any subsequent production cuts are just to keep the target production capacity consistent with the actual production capacity. From another perspective, both production cuts will consolidate OPEC+'s position as the oil-producing country that will ultimately regulate production, and of course this will also lead to higher oil prices.
People may have reason to doubt that since the current oil price is already higher than the best price the organization said a few years ago ($60 to $70 per barrel), why should OPEC+ raise the price?
Inflation is one of the reasons. It is everywhere, and the best oil price point in the past is not necessarily the best in the future. But there is another more important reason: backup production capacity.
In a report on the upcoming OPEC+ meeting, the Financial Times quoted sources from Saudi Arabia: Saudi supports production cuts because it will extend the vitality of backup capacity.
If these reasons are justified, then any production cuts by OPEC+ now and in the future will be a more significant strategic shift. OPEC+'s actual daily output in August was 3.6 million barrels less than its target output, up from 2.9 million barrels a month ago, while OPEC+'s daily output increased by 490,000 barrels in June. In September this year, despite not meeting its target, Japan's oil production rose to its highest level since 2020. Interestingly, one of the leading countries in production growth last month and one of the long-term underperforming countries: Nigeria . Another leading country in growth is Libya . Due to the complex political situation, the country is not bound by OPEC+ production quota, so there is almost no security concern for oil supply.
Nigeria and Iraq and other countries are hard to be happy about the dramatic cuts. Both countries are very eager to expand crude oil extraction and exports. But as before, a decline in production will lead to price increases, and this view will still be mainstream in future OPEC+ meetings.
Meanwhile, OPEC+ has been strengthening its control over the oil market, although it has poor results and limited backup capacity.
Now, Saudi Arabia has very good reasons to keep it idle. Until this year, Russia was the world's largest exporter of crude oil and fuel. But as the country's exports are sanctioned, energy supply will sooner or later be tight, and the diesel market will be the first to be affected.
Although the decline in Russian oil production is not as big as people worry, Russia is shifting from natural gas to oil power generation due to the rising price of natural gas , which has also increased demand for oil. Worries about the recession are reasonable, especially now, which is almost a foregone conclusion for Europe.
However, even during the recession, residents and businesses will use electricity, and demand damage may be less than expected, so OPEC may relax production cuts in the future.
As before, OPEC must grasp the lifeblood of the market, but at the same time, it also needs to protect backup production capacity to ensure that the market remains healthy for the long term.
Translator: Sun Jiatong
Reviewed by: Zhang Ningning
Edited by: Fan Chunxiao
