Reuters: Saudi Arabia, Emirates to ‘hold back’ oil production in case of winter supply crisis

OPEC leaders Saudi Arabia and the United Arab Emirates are ready to provide a “significant increase” in oil production should the world face a severe supply crunch this winter, sources familiar with the thinking of its top exporters said. Gulf, according to Reuters.

When the Organization of the Petroleum Exporting Countries and its allies (OPEC+) decided on Wednesday to increase oil production by just 100,000 barrels per day (bpd), breaking a taboo with a rare reference to the group’s excess capacity.

The statement referred to the “severely limited availability” of spare capacity, saying this meant it had to hold it in reserve for “severe supply disruptions”.

At first glance, this reads as an acknowledgment that OPEC leader Saudi Arabia has little room to raise output, as French President Emmanuel Macron said in a conversation with US President Joe Biden last month.

Three sources, who spoke on condition of anonymity because of the sensitivity of the matter, said Saudi Arabia and the UAE could pump “significantly more” oil, but would only do so if the supply crisis worsened.

“With probably no gas in Europe this winter, with a potential price cap on Russian oil sales in the new year, we can’t dump every barrel on the market right now,” one of the sources said.

The sources did not quantify any increase, but said Saudi Arabia, the UAE and some other OPEC members have about 2.0-2.7 million bpd of spare capacity.

“The only time we can demonstrate that we have more spare capacity is when it comes to a long-term crisis,” the source said, adding that that would be when OPEC members would increase output.

That could happen as early as this winter, the sources said, as the political and economic standoff between OPEC+ member Russia and the West over Moscow’s invasion of Ukraine shows no sign of easing.

The invasion, which began on February 24, which Moscow describes as a “special military operation” sent European gas prices to record levels and pushed international Brent crude to 14-year highs.

As a result, inflation reached multi-decade highs and central banks began raising interest rates sharply.

But international oil prices have eased from peaks in March and fell again on Wednesday after US data showed weak demand for the fuel – in part because high prices have curbed consumption.

Analysts said OPEC+ saw no logic in adding oil to a falling market.

“With spare capacity below 2 mbpd (million barrels per day) in August, we believe OPEC+ preferred to use its cushion to deal with potential future disruptions,” PVM’s Tamas Varga said in a note to clients.

“There are growing fears of a big drop in demand, and if the current trend continues, the additional barrels will put unwanted downward pressure on prices and, at the same time, needlessly use up diluted spare capacity.”

A gesture of “good will”

After Biden visited Saudi Arabia in July to push for more oil to cool international markets, analysts speculated that OPEC+ would increase supply.

The trip to Saudi Arabia was planned only after OPEC+ announced in early June that it would increase production in July and August. Production for September was discussed at Wednesday’s meeting.

Most OPEC+ members are struggling to meet production targets having already exhausted their production capacity after years of underinvestment in new capacity.

Against this backdrop, Wednesday’s decision to raise output targets by 100,000 bpd, one of the smallest increases since OPEC quotas were introduced in 1982, was a goodwill gesture, one of the sources said.

“It’s small, yes, but it shows that OPEC+, since it includes so many countries, like Russia, Iran, Venezuela with all their grievances, has been able to gather consensus and move forward,” the source said.

After Wednesday’s decision, the White House said President Biden would remain focused on keeping fuel prices low.