OPEC+ likes $100 oil, won’t defend it

Saudi Arabia and Russia, the de facto leaders of the OPEC+ oil producer group, see $100 a barrel as a fair price that the global economy can absorb, sources familiar with government thinking in the two countries told Reuters. The Organisation of the Petroleum Exporting Countries, Russia and other allies, known as OPEC+, pumps more than 40% of the 100 million barrels per day of global output.

The group has a powerful influence on global fuel prices through its supply policy. OPEC+ does not explicitly state its preferred price level. Top officials in both Saudi Arabia and Russia have said in recent weeks that the group’s policy focus is to ensure that the global oil supply matches demand, not defend a certain price. “Our focus is straightforward – looking at supplies and demand balances over a period of no less than a year and most often a year and a half,” a senior OPEC+ source with knowledge of the matter told Reuters.

One of the key measures of supply-demand balance, however, is price. When demand threatens to outstrip supply, prices rise and vice versa. Recent signals suggest a preferred price level of around $90 to $100 a barrel for Brent crude, the three government sources and analysts told Reuters. Oil traded at $100-$120 for most of the second quarter which alarmed governments in many countries that were already dealing with runaway inflation.

The United States has led countries in pushing Saudi Arabia and other producers to pump more to cool rising prices for over a year. But top oil producers including Saudi Arabia have made public statements in recent weeks to support prices which had fallen towards $90 amid weakening outlooks for the global economy and demand. Those statements culminated in OPEC+ making a symbolic cut in its oil output target of 100,000 barrels per day (bpd), which many analysts interpreted as a signal the group would defend prices above $90.

“The price corridor has risen with rising material costs and inflation,” said a separate source briefed on Saudi government debates. “An oil price at $120-130 is risky and Saudi will prevent that, but at $100 it won’t have a huge impact on the global economy - Saudi would be comfortable with that price,” one of the three sources revealed. While most OPEC+ producers rely on oil revenue and have different oil price requirements to balance their budgets, Saudi Arabia and Russia have no official price target. Saudi officials have not talked openly about a price target or a price aspiration for years. Oil nations’ coffers, including that of Saudi Arabia, were depleted by the pandemic-induced price collapse in 2020. High prices are helping them refill their coffers.

The International Monetary Fund (IMF) in April projected Saudi Arabia’s breakeven oil price - the oil price at which it would balance its budget - at $79.20 a barrel. The Saudi government does not disclose its assumed breakeven oil price. “Over $100 is a windfall for the state,” said Karen Young, senior fellow at the Middle East Institute in Washington. “I think the comfortable level is anything above $80, but fiscal policy is flexible,” he added.

“Oil at $100 is also needed for companies around the world to maintain healthy investment levels to ensure supply keeps up with demand,” said the source familiar with Saudi government thinking. Russia has different motives to Saudi Arabia for its price comfort zone. This year, Moscow has had to sell its crude at a discount to benchmark prices to buyers in Asia, because Europe and the United States have banned or discouraged Russian oil imports in retaliation for the war in Ukraine. “Russia wants oil at not less than $100 to compensate for the discounts,” two industry sources familiar with Russian thinking said.