OPEC+ output cut is mostly a ‘political snub’ and sends symbolic message, analysts say
OPEC+’s decision to implement a small production output cut is more of a political statement and symbolic message sent by the alliance, analysts said.
On Monday, the group announced a small oil production cut of 100,000 barrels per day to bolster prices. Just last month, OPEC+ decided to raise oil output by the same target of 100,000 barrels per day.
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“Essentially, it’s like a zero sum for the market,” said Ellen Wald, president of Transversal Consulting. “The increase [in oil production] last month was also almost nothing… and now we’re talking about taking those away.”
Wald said the underlying message is more significant than the cut itself.
“The symbolic meaning of this cut is, I think, much more important for the market,” Wald said, adding that the price of Brent crude was “pushed up so much” following the decision.
Oil prices rose about 3% on Monday following OPEC’s announcement. The rally has since lost steam, paring gains in Tuesday trade. Brent Crude stands slightly above $95 per barrel while West Texas Intermediate hovers around $88 per barrel.
“[They’re] basically saying — look, we have been talking about a cut. A cut is totally within our power and we very well may put through a cut that would be much more significant than this,” Wald said, adding that Russia’s influence is quite significant in OPEC+.
“It’s more of a political snub to President [Joe] Biden as well as the European Union, signaling that OPEC is going to go its own way and they want to protect those higher prices,” said Andy Lipow of Lipow Oil Associates, who also mentioned that the cut was “quite paltry.”
Price cap may end ‘pushing up the price of oil’
Both analysts were skeptical about the efficacy of Russian oil price caps.
Last week, the G-7 countries agreed to cap Russian oil prices to reduce funds flowing into Moscow’s war chest and bring down the cost of oil for consumers.
Details of how the price cap will work are still being finalized, but analysts have raised concerns over whether key consumers will participate.
“[It] doesn’t look like India is really about to sign on here. And neither is China,” Wald said. She explained that even if some countries agree on not buying oil from Russia, other countries like India and China could purchase those barrels at a discount.
Refiners in China and India have been snapping up discounted Russian oil after Western companies curbed imports from Moscow. In May, the share of Russia’s total crude shipments by both countries reached a high of 45.4%. Russia has also held its spot as China’s top oil supplier for three consecutive months.
“I just don’t see how this works out in any way except to end up pushing up the price of oil for everyone, except for those who are continuing to buy Russian oil,” Wald said.
Similarly, Lipow said the price cap is inviable because both China and India are “already benefiting from deeply discounted Russian oil” and have nothing to gain by getting on the bandwagon.
He added that the price cap protects consumers from paying higher prices rather than reducing demand for oil.
“They don’t have an incentive to reduce demand… What it means is that the governments around Europe are gonna be printing money to send to the consumers, and going deeper into debt.”
The EU countries’ energy ministers will meet on Friday to discuss methods to control surging gas prices.