Key Points
- OPEC+ announced a supersized headline production cut that is scheduled to run through the end of next year.
- While the official reduction is 2 mb/d, given the serial underperformance of a number of producers, the actual cut will likely come in around the 1 mb/d range.
- A more clear risk, in our view, is the introduction of US product export restrictions in a rising retail gasoline price environment.
- More Middle Eastern barrels will need to move to Europe to prevent the continent from being undersupplied when the Russian oil embargo commences.
- Given the economic calamity that could be coming, Western leaders could find themselves calling on those spare barrels in two months’ time.
Helima Croft, Global Head of Commodities Strategy at RBC Capital Markets shares her key takeaways and initial analysis of the production impacts that may come out of the OPEC+ October 5, 2022 meeting.
As anticipated, OPEC+ announced a supersized headline production cut that is scheduled to run through the end of next year.
While the official reduction is 2 mb/d, given the serial underperformance of a number of producers, the actual cut will likely come in around the 1 mb/d range with Saudi Arabia accounting for more than half of the output adjustment. Previously, we suggested that the Kingdom would look to put a circuit breaker on a market that had been driven downwards by recessionary concerns and fears of aggressive Fed action.
The Washington reaction to the OPEC+ move has been fast and furious, with administration officials and leading Congressional Democrats accusing Saudi Arabia of siding with Vladimir Putin and vowing to pursue a range of responses to shield US consumers from the impact of rising prices.
While the White House signaled that further SPR releases are in the offing, we continue to contend that the follow-on sales will likely be more incremental and that we are unlikely to see another blockbuster release in the near term.
A more clear risk, in our view, is the introduction of US product export restrictions in a rising retail gasoline price environment. Congressional action on NOPEC legislation also looks like a credible outcome in light of the NSC statement about working with Congress to reduce OPEC’s overall influence on the oil market. White House opposition to NOPEC has served as a restraining influence on Congressional leaders.
The dog whistle may be interpreted as a sign that the President will not necessarily stand in the way of a floor vote on the bill that would declare OPEC a cartel and subject the members to Sherman anti-trust legislation.
And yet, the need for additional molecules come December may ultimately serve to moderate the White House response to OPEC’s move.
More Middle Eastern barrels will need to move to Europe to prevent the continent from being undersupplied when the Russian oil embargo commences. There has already been a marked increase in Saudi exports to Europe but this trend will need to accelerate over the next two months. They will also be called on to increase output again in December in the event that there is a significant Russian supply disruption because of a deliberate action from Moscow or the launch of the EU’s sixth package of sanctions.
This decision allows key Middle Eastern producers to build back spare capacity as many of them have already hit production and export constraints. Saudi Arabia’s supply numbers on a 3-month rolling average basis have reached all-time highs. Given the economic calamity that could be coming, Western leaders could find themselves calling on those spare barrels in two months’ time. Hence, the heated rhetoric may soon give way to policy pragmatism.
Helima Croft authored “OPEC+ Wrap Up: Reaction Response,” published on October 5, 2022. For more information on this commentary or to access global commodities research, please contact your RBC representative.
