The move on Sunday sparked a diplomatic firestorm when the group agreed to cut output by 2 million barrels a day at its last meeting in October. The move drew sharp rebuke from the White House and President Biden’s promise of “consequences” for Saudi Arabia, the organization’s most powerful member.
But predictions that the cut in October would raise gas prices and create a new flow of money to finance Russia’s war against Ukraine have not come true. Just weeks after the consortium announced the cuts, oil prices began to fall. Gasoline is cheaper now than it has been in nine months, with consumers paying lower prices than before the Russian invasion.
The average price of U.S. regular gas on Sunday was $3.41 a gallon, according to AAA, down sharply from June’s high of more than $5.
The drop in oil and gas prices is due to lower demand amid fears of a global recession, new covid lockdowns in China and the impact of soaring interest rates in the US. Meanwhile, some major US refineries, which had been shut down for maintenance and repairs, have restarted and added to the world’s fuel supply.
All these forces have put OPEC Plus in a difficult position. The group’s leader, Saudi Arabia, was under pressure from the United States to either increase production or at least prevent further production cuts. But the current market conditions of falling prices justified the cuts they supported in October, despite the diplomatic furor the Saudis unleashed.
The organization said in a statement on Sunday that the October discount was “purely driven by market considerations and recognized by market participants as a necessary and correct step towards stabilizing the global oil market in retrospect.”
The next meeting of OPEC Plus to review production is scheduled for June. But the group said in a statement that the timetable was subject to change and that it could “meet at any time and take immediate additional measures to address market developments and support oil market balance and, if necessary, its stability.”
Amid internal OPEC Plus discussions this weekend, an agreement was reached on Friday by Ukraine’s allies to impose a price cap on Russian oil. The limit, set by the G7 and Australia, is meant to keep Russian oil flowing to some global markets, but limit the amount of profit the Kremlin can make to finance its war machine.
Countries are imposing price caps, as was the ban on Russian oil imports from Europe on Monday. As the ban still does not apply to other parts of the world that buy from Russia, the price cap is seen as an additional tool to limit Russia’s oil revenues. Europe and the US will enforce the measure, using significant control over oil carriers and their insurance companies.
OPEC Plus has been closely following the European debate over the price cap, as it poses a direct threat to its control of oil markets. The cap essentially works as a “buyer’s cartel” where countries band together to influence the price of oil producers.
“A cartel of institutionalized buyers could erode OPEC+’s price-setting power,” research firm ClearView Energy Partners wrote in a note to clients late last week.
The agreement to lower the cap has been a difficult balancing act, as some European nations such as Germany fear that setting the price too low will prompt Russia to retaliate by cutting off supplies. Other nations, especially in Eastern Europe, wanted a lower price to inflict pain on Russia.
But the countries ultimately agreed on $60 per barrel, which is an amount Russia can sell its oil at exorbitant prices. The decision likely allayed concerns among OPEC Plus members that the limit would reduce the impact on oil markets.