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Oil supply cuts are on the table as Opec+ meets in the midst of a crude sell-off

Despite worldwide inflation, Saudi Arabia's energy minister is under pressure to keep oil prices near $100 per barrel.

On Monday, the Opec+ cartel discussed cutting oil supplies to support prices as Saudi Arabia and other producers grappled with increasing inflation, which threatened to send the world economy into recession.

The likelihood of fresh restrictions comes less than six weeks after US President Joe Biden met Crown Prince Mohammed bin Salman in Jeddah and stated the kingdom will take "further actions" to increase oil output "in the coming weeks."

With the midterm elections in Congress only two months away, the Biden administration has welcomed a drop in crude prices in recent weeks as it fights to reduce excessive fuel prices that have fueled decades-high inflation and forced central banks to begin raising interest rates.

However, the 11% decline in oil prices last week has spurred several Opec+ members to call for a policy reversal following months of production increases. In early Monday trading in Asia, international benchmark Brent rose 1% to $94.41 per barrel.

The Opec summit comes as Europe's energy crisis worsens, with Sweden's government warning of financial threats from the continent's rising fuel costs over the weekend.

According to people briefed on Saudi oil thinking, the kingdom, Opec+'s de facto leader, has not yet decided to shift course, but energy minister Abdulaziz bin Salman is under pressure from the crown prince — his half brother — to keep prices near $100 a barrel.

Abdulaziz said recently that while “volatility and thin liquidity [was] sending erroneous signals” to oil markets, Opec+ had the means to deal with the problem, “including cutting production at any time”.

“Opec would prefer to hold policy steady,” said analysts at consultancy Energy Aspects, “but the market may force the producers to announce a cut”.

“Price volatility, a bearish market narrative, and news of more Covid lockdowns in China are a cause for concern right now,” said Amrita Sen, the consultancy’s head of research. “That’s why all options are back on the table.”

The recent oil sell-off has left prices lower than before Russia's invasion of Ukraine, which prompted a surge that brought prices near to a record high in March. The United States and other countries responded by releasing oil from emergency reserves and urging Saudi Arabia to raise output.

The US obtained G7 support on Friday for a plan to impose a price restriction on Russian crude exports, aiming to prevent an oil price increase later this year when European sanctions against Russia intensify.

According to Christyan Malek, an analyst at JPMorgan, Opec+ is considering three possibilities for October: maintaining with present production restrictions, stating a "intention to decrease" production from next month pending new supply and demand data, or agreeing to a drop immediately.

Cuts would also allow the group to keep "firepower" in the form of spare capacity in the event of a large decrease in Russian output later this year, or if turmoil in Iraq affects production, according to Malek.

However, a number of complicated issues, according to those briefed on the conversations, may cause the kingdom to reconsider.

“Abdulaziz has a clear track record of backing words with action,” said Helima Croft, head of global commodity strategy at RBC Capital Markets. But while Opec+ had “laid the ground for another policy pivot”, she thought the group would stick with current policy.

While the prospect of a sharp drop in Russian oil output and further turmoil in Iraq and Libya are pushing up oil prices, a possible Iran deal that would allow Tehran to export more oil and fears of a recession are weighing on the market — and on Saudi strategy, according to people familiar with the kingdom's thinking.

“Unprecedented two-way risks may argue for holding steady, but Riyadh has clearly warned against the crude market overshooting to the downside, a signal it may backstop with a cut,” said Bob McNally, a former adviser to the George W Bush White House and now head of Rapidan Energy Group.

“The goldilocks band for Saudi has moved up to around $100 a barrel,” said Raad Alkadiri, a managing director at Eurasia Group. He expected Opec to stick with current policy on Monday, but suggested the kingdom’s willingness to consider cutting supply just weeks after Biden’s Jeddah visit was a “sign of growing independence from the US”.

The Saudi authorities did not respond.



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