Opec+ is an alliance between several oil-producing nations. It was originally founded in 1960 in Baghdad, Iran, made of only 5 sovereigns. Since it has grown immensely and has moved its headquarters to Vienna, Austria. This is the location of the upcoming Opec+ meeting on Wednesday 5 October 2022, where heads of the sovereigns of the member countries will come together to discuss a potential cut to oil production.
Speculation suggests the sovereigns are planning a cut in oil production, in order to boost the price of oil, through basic supply and demand mechanisms. Currently, the planned cut could mount to a total of 1million barrels a day. This corresponds to more than 1% of global oil supplies.
The Opec group in general command a substantial share of the world's oil output. According to recent estimates, around 80.4% of the world's proven oil supplies are located within Opec group countries, with around 2/3 of Opec's supplies contained within the Middle East.
However, the world's largest producer of crude oil remains to be a non-Opec member country: namely the United States of America. The USA supplies around 14.5% of world crude oil, with Russia in second place at 13.1% and Saudi Arabia in third at 12.1% (all figures taken for 2021).
At a time when energy prices are being targeted and caps are being introduced to slash them, it seems unnatural to plan to increase oil prices. However, the collusive nature of Opec means it is in the best interests of the oil-producing nations to increase prices and so earn more revenue globally.
However, there may be another incentive at play. With supply chain disruptions ever apparent, and fears over the future of crude oil supply mounting, many of these countries may support a production cut for domestic protection. Keeping more oil reserves may be in the best interest of these nations as the economic climate worsens and uncertainty grows.
On announcement of news that Opec was planning a production cut, the Brent benchmark rose 3% to $87.67 per barrel. This has been a significant fall from the heights seen following the invasion of Ukraine by Russia, when the benchmark reached over $130 per barrel.
Tensions between the 3 largest oil-producing nations is evident as ever. The US has concerns over the relation between Saudi Arabia and Russia, and whether this move is an attempt to help protect Moscow from some of the sanctions it has faced. The US has used crude oil as a monetary tool to attack Russia, by halting revenues it receives from it to stop Russia funding its war. The price-cap on Russian oil has meant Russia received less revenue on the barrels it sells. But the move may worsen relations between US and other Opec sovereigns, in which case the incentive to halt supply to hold barrels is a strategic move.
The meeting on Wednesday will allow us to see the true extent of this production cut, and how the Brent benchmark will react to news upon this. Concerns over further sanctions may grow as the US looks to hurt the Russian economy further.