Saudi Arabia has defended the OPEC+ decision to cut production, saying a US request to push back the move would have had a negative economic impact.
The statement, from the Ministry of Foreign Affairs, rejected that the cut was “politically motivated” against the US. Such a suggestion, it said, is not based in facts.
The US was extremely critical of the OPEC+ decision to cut earlier this month. The group said it would impose a 2 million barrel per day reduction in output as of November.
The decision for a cut was based “purely on economic considerations” that aim to secure the balance of supply and demand, while limiting volatility.
It was as a result of this economic analysis, the ministry said, that it had rejected the US suggestion to delay the cut by a month. There have also been reports that the US administration offered to begin purchasing crude for its reserves should oil prices fall too far.
Saudi has a strategic relationship with the US based on “mutual respect, enhancing common interests”, in addition to security efforts and creating prosperity.
The statement from the ministry is unusual, in that it is not often involved in defending decisions made by OPEC. It did say that decisions, such as the cut, are made by consensus and that Saudi is just one of the members of the group.
A note this week from Verisk Maplecroft principal MENA analyst Torbjorn Soltvedt said the OPEC+ decision to cut demonstrated a loss of influence from the US.
President Joe Biden’s administration has few good options to respond, the analyst said. Withdrawing military forces or targeting OPEC with anti-trust legislation would likely drive up oil prices, the opposite of what the White House needs as it goes into mid-term elections.
Short-term pains
“Saudi Energy Minister Prince Abdulaziz bin Salman has clarified that the real cut will be lower than the headline 2 million bpd figure due to several member states falling far short of their individual production ceilings,” Soltvedt said. “In reality, the cut is likely to be less than half of the announced 2 million bpd.”
Fitch Ratings has agreed that the actual cut from OPEC+ would be lower than the 2mn bpd headline figure. The agency predicted it would work out at around 1.15mn bpd. However, it said, this would do little to reduce volatility.
In the short term, the ratings group expects volatility to remain high, based on geopolitical factors. These include further sanctions on Russian exports and a potential conclusion of the Iran nuclear deal. These “could significantly shift supply patterns and cause large fluctuations in prices”. An Iran deal, Fitch said, could add around 1.5mn bpd.
Prices will moderate in the medium to longer term, Fitch has said. Tensions will ease and prices will move “closer to full-cycle costs”.
However, Verisk Maplecroft’s Soltvedt said, the OPEC cut will put further pressure on the US-Saudi relationship, he said.
“Asia now accounts for more than 80% of the Middle East’s oil exports. This has led a growing number of US lawmakers to question why the American navy should underwrite the security of Middle Eastern oil exports when those barrels are increasingly going East rather than West,” the Verisk Maplecroft expert said.
A number of Democratic senators have spoken out against the production cuts. They warned that they might take steps to disrupt arms sales.