In the face of sharply falling oil prices, Saudi Arabia wants to pull the emergency brake. The energy minister holds out the prospect that OPEC and its partner countries will cut production. Iran also plays an important role in the calculation.
Oil prices rose sharply in the first five months of the year. But the turnaround followed in the summer. Oil prices have now reached a level where Saudi Arabia sees a need for action. Oil Minister Abdulaziz bin Salman has hinted that his country’s oil cartel OPEC and its allies may cut production at the next meeting in September. The shortage of supply should drive the price up.
To put this in context: at the beginning of the year, a barrel (159 liters) of OPEC oil cost just under 78 US dollars. Around $124 was reached in mid-June. But things have been going downhill since then, and you can currently get a keg for around $99.
The oil minister told financial services provider Bloomberg that oil market prices were not reflecting underlying supply and demand fundamentals. That could prompt the oil association OPEC to throttle production.
After the Russian attack on Ukraine, OPEC reversed the production cuts introduced during the pandemic. The alliance of 23 nations, including Russia, decided at the beginning of August to raise its production targets for the fall only slightly. OPEC, which has a massive influence on the oil market with its partner countries, opposed the demands of the USA for significantly more oil.
Shortly thereafter, the OPEC alliance lowered its forecast for the third time this year of how global oil demand will develop. It now expects the global economy to grow just 3.1 percent this year – 0.4 percentage points lower than the previous forecast in July. Daily crude oil demand will average 100 million barrels for the year instead of the previously forecast 100.3 million barrels.
Against this background, it should come as no surprise if OPEC starts pumping less oil soon. Several reasons are held responsible for the sharp drop in the price of oil. The most important: In the USA and Europe, the economy could cool down due to higher interest rates, which would depress demand for oil. Lockdows imposed in China are slowing the economy in view of the strict zero-Covid policy.
In addition, Iran could soon start exporting more oil again. Negotiations are currently underway to revive the international nuclear agreement. They aim to limit Iran’s nuclear program. Should Iran agree to the conditions, economic sanctions would be lifted in return. The OPEC member would then be able to deliver more crude oil to western industrialized countries.
