How we think the Opec+ meeting will play out

Good morning and welcome to Energy Source, coming to you today from London.

The main focus this week is Opec+ and whether the recent slide in oil prices — and mounting anger among many members over the Israel-Gaza war — will result in the group deepening production cuts when they meet on Sunday. I’ll be covering the meeting in Vienna, which is always a riotous swirl of gossip, intrigue and overpriced club sandwiches in those gilded hotel lobbies ministers just love to pass through.

Any readers who are going to be there, drop me a line.

While many oil traders have largely discounted the threat of the war spreading in the region or having a significant impact on prices (Brent crude is lower than it was on October 7 when Hamas killed about 1,200 people in southern Israel), some analysts think the market has been too quick to discount all the risks.

Opec+ also faces a number of more mundane challenges. Not least is rising production among its own members, from higher Russian exports to the potential for a significant jump in volumes from Iraq.

There’s a lot to unpack, so without further ado let’s get into the details.

Thanks for reading. — David

Saudi Arabia’s Opec+ dilemma

The current expectation going into Sunday’s meeting is that Saudi Arabia will, at a minimum, extend its voluntary 1mn barrel a day production cut at least until the spring. This cut, was first introduced in the summer as a one-month deal (or “lollipop” for the market, to use Saudi energy minister Prince Abdulaziz bin Salman’s unique turn of phrase).

This “lollipop” was on top of the group’s wider production cuts, meaning the kingdom’s production went down to 9mn barrels a day — significantly below its maximum capacity of about 12mn b/d.

The hope in Opec+ was that the oil market was going to tighten in the second half of the year. But while crude had a brief flirtation with challenging the $100 a barrel level in September, largely buoyed by the extension of the Saudis’ voluntary cut (and a bit of assistance from Russia), prices have fallen back.

Last week Brent hit a four-month low of $77 a barrel, which is not only below the level at the start of the Israel-Gaza war, but also below where prices traded in October 2022 — when Saudi Arabia first led the cartel in starting to reduce production, despite opposition from the White House.

So expectations of a further cut have grown. The FT reported on Friday that a further additional 1mn b/d cut by the group would likely be on the table, while Reuters had its own report saying a cut (of unspecified size) was now under consideration. Prices have since rebounded.

While a 1973-style oil embargo has been ruled out, people close to the thinking of ministers in the Gulf said that anger over the Israel-Gaza conflict was feeding into a desire to send a signal: yes, the primary aim is to support the oil price, but a decent-sized cut can also subtly express displeasure over the US’s approach to the conflict.

The politics, as ever with Opec+, are complicated. Saudi Arabia has portrayed itself as a leader in the Arab and Muslim world, hosting an “extraordinary” summit on Gaza earlier this month that alleged Israel has committed war crimes. (Israel denies this.)

Saudi Arabia’s foreign minister has subsequently led a delegation to China to discuss Gaza, on what the country claims is a tour of permanent members of the UN Security Council (US, China, France, UK and Russia). But it is arguably notable that Beijing was the first port of call, when the US is the kingdom’s oldest ally, and generally the interlocutor on Middle Eastern matters.

The kingdom may want to eventually revive a plan to normalise relations with Israel, which has been put on ice during the conflict. In return they would seek an enhanced security relationship with the US. Some analysts think the pause in diplomatic progress with Israel gives Saudi Arabia the space to discount any concerns in the White House over further cuts for now.

The Biden administration’s chief energy adviser, Amos Hochstein, has said he is confident Opec+ won’t “weaponise” oil supplies, though that doesn’t rule out a cut, which the group could sell as motivated purely by the weakening market. The White House has absorbed a number of similar slights in the past year, happy that oil prices have remained relatively manageable ahead of next year’s presidential election.

Opec member Iran, meanwhile, has pushed for an oil embargo. While an embargo is likely to be discounted, Tehran may try to rally members to support more limited curbs alongside members like Algeria and Kuwait, which have been vocal in their opposition to the war.

The thinking is that Saudi Arabia may be willing to get onboard with a cut, if it is sold publicly as being driven by oil market fundamentals — and if it believes doing so will bolster its position among Arab and Muslim countries.

The kingdom is likely to want some concessions, however. Iraq, for one, is exceeding its production target and could bring even more barrels to the market if a deal to reopen its Kurdish export pipeline is soon agreed.

Iran’s own exports have also been rising, which could reignite calls for it to be given a production target — which has been suspended while it is under US sanctions. There is undoubtedly some frustration among Gulf producers that the US has appeared to soft-pedal sanction enforcement of late.

Russia is something of a wild card. It is unlikely to oppose further cuts and anything that upsets the White House would be welcomed in Moscow. But is it willing to restrict its own output significantly while desperate for funds for its war in Ukraine?

A week is a long time in the oil market. Expect some more drama before Sunday arrives.

Power Points

Energy Source is written and edited by Jamie Smyth, Myles McCormick, Amanda Chu, Tom Wilson and David Sheppard, with support from the FT’s global team of reporters. Reach us at energy.source@ft.com and follow us on Twitter at @FTEnergy. Catch up on past editions of the newsletter here.