White House Freaks Over OPEC Plan To Cut 2 Million Barrels Per Day

Today the oil ministers of OPEC member nations gathered in Vienna for the first time in 2.5 years and agreed to cut their oil production volumes by 2 million barrels per day.

The Biden Administration has reportedly been “having a spasm and panicking” over the plan, which would remove more oil from the market than Biden has been unilaterally putting into it via 200 million barrels of “emergency” releases this year from the Strategic Petroleum Reserve. Biden would like to avoid an oil price spike between now and Election Day. Oil prices are well off highs, but up about 6% in the past couple days to $87.80 for West Texas Intermediate. Average gas prices in the U.S. have fallen from $5 a gallon in June to a recent $3.75.

Is this really anything worth wringing hands over? As Forbes contributor Michael Lynch pointed out yesterday OPEC has been producing some 3 million bbl per day below its agreed quota levels for months, since well before Biden in July journeyed to Saudi Arabia to beg for more oil and was rewarded with only 100,000 bpd. Bill Farren-Price, head of macro oil research at Enverus believes OPEC will cut from actual production levels, currently around 39 million bbl per day; “That means they will have to agree on what actual production really is.” Farren-Price is concerned that OPEC could overstep. “There will be political consequences. This is not what you do with your major arms supplier.”

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The impact could be severe, and the message to global bureaucrats unmistakable: butt out. The OPEC nations do not appreciate the G7’s harebrained attempts to try to impose a price cap on trade in Russian oil, because it sets a bad precedent that oil consuming nations think they have a say in setting prices. That will backfire. By insisting on price caps, says oil analyst Anas Alhajji, “Unwittingly the G7 have forced OPEC+ to stick together and support Russia in its oil trade on one hand, and think about a major production cut on the other.” Neither do OPEC nations appreciate the Biden administration unilaterally competing with them by selling 1 million barrels per day (200 million cumulative so far this year) from the Strategic Petroleum Reserve. When it became clear in recent months that there was no oil supply emergency, the White House could have reduced SPR releases. Instead Biden sent Janet Yellen to appeal personally to Gulf oil ministers not to cut.

The FT reported this morning that the United Arab Emirates was a late holdout, but finally decided to go along with cuts. In a hint of Saudi thinking, the CEO of Saudi Aramco amir said at an Energy Intelligence event this morning that it’s important for the Kingdom to maintain a supply cushion. If Aramco boosted output to full capacity of 12 million bpd it wouldn’t have anything left in case of emergency. The subtext: if the U.S. is going to sell its emergency supply in a time of non-emergency, then no one should fault the Saudis, as responsible market maker, for maintaining a buffer of liquidity. As Dan Pickering, chief investment officer of Pickering Energy Partners, tweeted this morning: “Food for thought … OPEC can cut more/longer than Biden administration can release from SPR. This OPEC meeting is a wakeup call for U.S. politicians that energy inflation is going to be STICKY”

Hat tip to David Sheppard of the FT for the video clip this morning of UAEUAE
oil minister grinning while saying “this is a technical organization” not a political one.

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Politics aside, Goldman Sachs analysts Damien Courvalin and Callum Bruce had this illuminating passage in their note this week that lays out the entirely economic rationale:

“Historically, OPEC has often cut production in the face of weakening demand, yet it has never implemented a cut in such a tight market, with inventories at historically low levels, record strong seasonal crude timespreads and with demand remaining resilient despite the macro headwinds. […] Ultimately, the ability for OPEC to conduct such a large cut is rooted in the lack of any supply elasticity, with shale activity showing signs of slowing, no spare capacity outside of GCC producers and with Russia’s production about to decline (leading it to support this time around a large cut by other producers). This is ultimately a return to the Old Oil Order, where core-OPEC acts under the rational behavior of a dominant producer with pricing power. In that sense, while exceptional, this cut is also logical as it maximizes the group’s revenues today with minimal sacrifice of future profits.”

OPEC may also be interested in making the inevitable look like a choice. Russian oil production has been surprisingly stable (averaging 9 million bbl per day in September), but is expected to fall at least a million bpd in the coming months as partners bail and investment lags. The December commencement of Europe’s Russian oil embargo could force Putin to tighten some spigots.

It’s a bit too late for Biden to start supporting more domestic oil and gas. Federal agencies have issued fewer drilling leases than during any administration since Harry S Truman. And besides, U.S. oil producers say they are too happy returning cash to shareholders to go spending it on drilling at a time when costs for workers and equipment have been surging.

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There’s a danger that Biden will feel he has to do something politically to fight back and look tough against OPEC. Maybe accuse them of actively backing Russia. Blame them for inflation. The worst he could do is limit American exports of oil or petroleum products, which the administration says it’s looking into.

America both imports and exports millions of barrels a day of varied petroleum products and blends. We export some domestic oil because U.S. refineries, especially on the West Coast, are optimized for particular blends of imported crude. An export ban would force refiners to retool to use only domestic oil and bring a wrecking ball to balanced supply chains and cut off our allies in Europe from vital supplies of U.S. diesel.

Winner of the cognitive dissonance award today goes to White House spokesman John Kirby, who in responding to OPEC’s plans echoed what for years has been the Republican line: “The U.S needs to be less dependent on OPEC+ and foreign producers of oil.”

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