Kazakhstan Juggles Profit and Diplomacy with New OPEC+ Production Cut
Author: Haley Nelson
Apr 11, 2023
On April 2, the Organization of Petroleum Exporting Countries Plus (OPEC+) shocked the global oil market as it collectively agreed to cut production by more than 1.66 million barrels of crude oil per day, over 1% of the global oil supply, a move that will jolt crude oil prices upwards and reaffirm the group’s market command. There may, however, be significant ramifications for OPEC's partnerships as the Saudi-led oil cut will undermine the U.S. struggle against inflation, elevate Russian energy profits, and fuel Saudi Arabia's nationalist energy policy. For Kazakhstan, one of the Caspian region’s two OPEC+ members, despite potential revenue increase, this move may add pressure to Kazakhstan’s Western relations.
According to the April 2 decision, Russia will lead the production cut by 500,000 barrels per day, Iraq- by 211,000 barrels per day, United Arab Emirates – by 144,000 barrels per day, Kuwait – by 128,000 barrels per day, and Kazakhstan will reduce its production by 78,000 barrels per day. Many producers, like Azerbaijan, declined to participate in the production cut as they’ve previously signed agreements to increase output for 2023. For Azerbaijan, these cuts are favorable; With Russia’s and Kazakhstan’s production cuts, Europe will look towards Azerbaijan as a more promising partner. But, for Kazakhstan, compliance with this decision to drive up oil prices reinforces Russia and Saudi Arabia’s strive to regain its position as the dominant force in the global oil market.
The oil pull-back will begin in early May, and it will last until the end of 2023. The voluntary cuts are in addition to the two million barrels per day reduction OPEC committed to between November 2022 and November 2023, proposed to draw in higher profits. However, due to production increases from some states, this engineered price spike never materialized, and OPEC now seeks to compensate for its lower sales by cutting production again.
While Saudi Arabia's deliberate efforts to cut crude oil outputs were publicly declared as a “precautionary measure” to prevent prices from falling further, insider sources claim otherwise. Some OPEC+ delegates indicated that these latest cuts are instead an attempt to counter negative market sentiment and establish firmer market control. Not only does this compromise Western energy security strategy, but it aggravates the risks implicating the global economic recovery, and it may deepen the coalition’s ties with Russia, China, and Gulf states.
Although OPEC claims to be responding to market “manipulation” from some producers, it is essential to note that demand has in fact stayed at a multi-year high. In fact, the UAE's Port of Fujairah experienced an oil inventory rise of 10% in the week of March 20, 2023; seaborne oil loading volumes were above their seven-year range, reaching 50 million barrels per day (bpd) in March, an increase of 40,000 bpd since February; and, Russian crude oil exports remained consistent despite sanctions, remaining near 3.6 million bpd in March. With record-high profits and stable market demand, it is unlikely that this move was preventative in any way. But it’s more likely that OPEC is adjusting their outputs to escalate their already-high profits and prove their ability to shape global markets.
After the announcement, on Sunday evening, oil prices shot up and raised the global oil price benchmark by 7%, and Azeri Light rose from $75.67 per barrel on March 31, to $80.71 on April 3. Although this is still far from its peak on June 13, 2022, at $120.93 per barrel, April 3 showed its highest price since January 23, 2023, a significant rise considering the recent downward trend. In response to OPEC's cuts, Brent crude rose by 7.13%, and some analysts believe Dubai crude could soon become more expensive than Brent and move into premium territory. However, these price increases should be approached with caution as they may weaken U.S. economic recovery.
The rapid price increase may complicate U.S. Federal Reserve efforts to control inflation. Goldman Sachs is predicting Brent oil will hit $95 per barrel by the end of 2023, resulting in an average of $3.85 per gallon of gasoline for American consumers. “OPEC+ has very significant pricing power relative to the past, and today’s surprise cut is consistent with their new doctrine to act preemptively because they can without significant losses in market share,” Goldman Sachs reported to their clients.
“We don’t think cuts are advisable at this moment given market uncertainty,” said Adrienne Watson, a spokeswoman with the U.S. National Security Council, and the France-based International Energy Agency (IEA) warned that these cuts “risk exacerbating those strains and pushing up oil prices at a time when strong inflationary pressures are hurting vulnerable consumers around the world."
Kazakhstan’s acquiescence with a decision that harms European and U.S. market security is damaging enough, but this move also coincides with Kazakhstan’s legal allegations against U.S.-based Shell and Exxon, and the $16.5 billion fine it’s imposing. Kazakhstan’s Ministry of Energy is claiming the shareholders of the Kashagan oil field and Karachaganak violated tender procedures between 2010 and 2019, and it failed to deliver full works by contractors at the Kashagan field. With this allegation, Kazakhstan is aiming to receive more revenue from the projects, and it additionally hopes to change the tender systems used by oil ventures to make the process more efficient and profitable for the domestic economy. As Kazakhstan is favoring revenues over its western relations, it risks painting itself as nation-centric power, and potentially reversing its recent diplomatic progress.
The OPEC-U.S. relationship has long been unstable, and although Kazakhstan has enhanced its ties with the United States, Kazakhstan’s compliance with Saudi Arabia-led moves to disrupt Western oil supply is out of step with their growing relationship.