Outsized OPEC+ output cut raises global risks: Russell
(The opinions expressed here are those of the author, a columnist for Reuters.)
By Clyde Russell
LAUNCESTON, Australia, Oct 6 (Reuters) - The reaction to the OPEC+ decision to cut 2 million barrels per day (bpd) from it crude oil production is more instructive than the decision itself.
The larger-than-expected reduction is both bullish and bearish for prices, depending on whether you are a buyer or seller, and what time frame you pick.
The crude oil market is both tight, or awash with supplies and unsold cargoes.
The Organization of the Petroleum Exporting Countries and its allies, including Russia, are either simply trying to balance the market, or they are trying to boost prices to a level all but guaranteed to cause a global recession.
Also in the current mix of uncertainty is what actually happens in the physical market to Russian exports of crude and refined products once the European ban on imports comes into effect in December, as well as the planned price cap on shipments to other countries.
It's worth trying to separate out the noise from the likely actual impact of the OPEC+ decision.
Firstly, a cut to production quotas of 2 million bpd doesn't translate into a loss to the global supply of the same amount.
This is largely because OPEC+ was already failing to meet its quotas, falling about 3.6 million bpd short in August.
Estimates vary as to how much oil will actually be lost, but perhaps the best place to start is with Saudi Energy Minister Prince Abdulaziz bin Salman, who said the real cut will around 1.0-1.1 million bpd.
Given that any cut is likely to come from Saudi Arabia, the de facto leader of OPEC+, and other Gulf producers such as the United Arab Emirates and Kuwait, it's worth taking Prince Abdulaziz at his word.
The question then becomes what impact this will have on the global crude oil market.
Clearly, OPEC+ wants to see prices hold around current levels, with global benchmark Brent futures LCOc1 ending at $93.37 a barrel on Wednesday, jumping some 1.7% on the OPEC+ news, but still well below the $120 level from mid-June.
The gamble for OPEC+ is that the world economy can handle oil above $90 a barrel as it heads into a slowdown, largely caused by spiking energy prices from the fallout from Russia's Feb. 24 invasion of Ukraine.
If oil prices stabilise around $90 a barrel, they will effectively fall out of the inflation calculations over the course of 2023, which may in turn allow central banks to stop tightening monetary policy, and in turn mitigate a global slowdown.
However, if central banks continue to raise interest rates and the global economy weakens substantially, then $90 a barrel crude becomes unsustainable, and a disorderly retreat in prices, as happened in previous worldwide recessions, becomes more likely.
The point is that OPEC+ probably feels it has some time on its side to see if the world economy can avoid a recession and whether it can hold crude prices on what the group would view as the correct side of $90 a barrel.
But such a strategy comes with risks, not least of which is mounting anger among consuming nations, especially the United States.
But it's also worth noting that China, the world's biggest oil importer, is unlikely to be happy with the OPEC+ decision, as the world's second-biggest economy struggles to fire up after imposing strict COVID-19 lockdowns and dealing with a shaky residential property construction sector and slowing demand for its key manufacturing exports.
China has been building crude inventories this year even as imports softened, raising the possibility that it can keep buying less oil while still increasing product exports.
Beijing recently approved 15 million tonnes of new product export quotas, which translates into about 120 million barrels of fuels such as diesel and gasoline.
China could in theory supply this product to the Asian and global markets without increasing its crude imports from current levels.
Much will depend on what Saudi Aramco 2222.SE , the kingdom's state-controlled producer, does with its official selling prices (OSPs), which are tipped to increase for November-loading cargoes after being cut for those being shipped in October.
If Saudi crude, and by extension those from other Middle East exporters who follow the Aramco pricing, becomes more expensive, it may curb demand from Asian refiners, which would help keep fuel prices elevated and raise risks of a deeper and longer economic slowdown.
It's worth noting that most countries in Asia are still experiencing near record high retail fuel prices, given the strength of the U.S. dollar, a situation likely to persist as the U.S. Federal Reserve tightens monetary policy at a faster pace than other countries.
Overall, what the outsized output cut from OPEC+ has done is raise the risks all round.
It's increased the chance of oil prices remaining too high for the current, and likely future state of the global economy.
It's raised the geopolitical temperature even further, straining traditional relationships such as the one between the United States and Saudi Arabia.
It's made it harder for policymakers to navigate an increasingly volatile and uncertain economic outlook.
It's undermined OPEC+'s claim that it only seeks to balance the global oil market, as it now looks like it is targeting a price level, rather than allowing the market to set the price.
GRAPHIC-OPEC+ agree to massive cut in oil supplies to boost
Editing by Sam Holmes
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