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Saudi Arabia is preparing to prolong oil production cuts into next year as Opec+ weighs further reductions in response to falling prices and rising anger over the Israel-Hamas war.
After prices hit a four-month low of $77 a barrel this week, four people familiar with the Saudi government’s thinking said it was highly likely to extend its 1mn barrel-a-day cut at least until the spring.
The voluntary measure, due to expire at the end of this year, was introduced in the summer as a temporary step on top of wider cuts by the oil cartel. At present, Saudi Arabia produces about 9mn b/d, compared with a maximum of about 12mn b/d.
Further cuts, which could inflame tensions with the US, are under discussion by Opec+ as it prepares to meet in Vienna on November 26.
While the oil price drop is the main cause, members are also indignant at Israel’s war on Hamas and the humanitarian crisis in Gaza.
An additional Opec+ cut of up to 1mn b/d could be on the table, one informed person said, describing the cartel as “galvanised” by the conflict.
Kuwait, Algeria and Iran are among the Opec members most agitated by the conflict.
“You should not underestimate the level of anger there is and the pressure leaders in the Gulf feel from their populations to be seen to respond in some manner,” said another person close to senior Opec figures in the Gulf.
The person said there would be no repeat of the oil shock of the 1970s, when Arab states halted exports to the west. But they added: “People have become complacent about the potential to tighten oil supplies to send a subtle message, which will be well understood both in the streets and Washington DC.”
US President Joe Biden is facing a difficult re-election battle next year, possibly against his predecessor Donald Trump, and the White House is already struggling to convince voters that the country’s economy is healthy.
The people close to Saudi Arabia’s thinking stressed that no final decision had yet been made. They emphasised that any public statements by Saudi Arabia’s energy minister, Prince Abdulaziz bin Salman, would keep the focus on the oil market, rather than the Israel-Hamas war.
Prince Abdulaziz recently hit out at hedge funds that have increased their bets against oil, amid expectations that the market may move into a small surplus next year because of the weak global economy and rising supplies outside Opec.
Christyan Malek at JPMorgan said Opec+ could carry out an additional 1mn b/d cut to pre-empt “potential demand weakness” in the first half of next year, with Saudi Arabia looking to other members to “share the load” of any further cuts.
Other analysts suggested that Prince Abdulaziz could push other countries to deepen cuts — or comply with past commitments to reduce production — by threatening that Saudi Arabia could shift back towards full production unless such steps are taken.
Russia, an Opec+ member that depends heavily on oil to finance its invasion of Ukraine, has been increasing seaborne exports in recent months.
The economic reform programme of Prince Abdulaziz’s half-brother, Crown Prince Mohammed bin Salman requires an oil price close to $100 a barrel, analysts maintain. The plan ranges from building hypermodern cities to hosting the 2034 football World Cup.
But some experts suggested Opec+ members will proceed cautiously, mindful of their growing role on the international stage. The United Arab Emirates, which hosts the UN COP28 climate talks in Dubai this month, is keen to portray itself as a modernising force.
“This is an incredibly delicate time in the Middle East,” said Helima Croft, a former CIA analyst and head of RBC Capital Markets commodities research.
“While the oil market has largely discounted the conflict spreading, there are still major risks, particularly on Israel’s northern border with Lebanon where a confrontation with Hizbollah could bring Iran into the conflict.”