OPEC+ struggles to inspire confidence as oil markets remain skeptical of its ability to shore up oil prices
Despite the decision by the Organization of Petroleum Exporting Countries and its allies in the OPEC+ to cut output further, markets are not convinced about the organization’s capacity to shore up crude market prices.
Last Thursday, during a virtual meeting, OPEC+ ministers agreed to voluntarily cut oil production by 2.2 million barrels per day (bpd) in the first quarter of 2024.
Saudi Arabia, the world’s largest crude exporter, will continue to lead the effort by extending its voluntary production cut of one million bpd of oil for at least another three months, that is, until the end of the first quarter of 2024. In addition, further voluntary barrel-per-day production cuts were also announced: Russia by 500,000 (from the former 300,000 bpd); Iraq by 223,000; the United Emirates by 163,000; Kuwait by 135,000; Kazakhstan by 82,000; Algeria by 51,000 and Oman by 42,000.
Russia’s additional output cut commitment includes a 200,000 bpd reduction in fuel product exports from Moscow. Russian Deputy Prime Minister Alexander Novak said Russia’s voluntary cut would include crude and products.
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But markets were not impressed. Late Thursday, in almost the immediate aftermath of the OPEC+ decision, WTI and Brent grade prices both dropped by two percent. By Friday evening, at the close of the working week, WTI and Brent prices had lost 2.49 percent and 1.61 percent, respectively, for January contracts.
There is no doubt this went against OPEC+ expectations.
The question of whether the commitments will be upheld remains uncertain. According to Craig Erlam, an analyst at OANDA, “(It) seems traders either aren’t buying that members will be compliant or don’t view it as being sufficient,” OANDA analyst Craig Erlam Erlam told media. It could also be that the “lack of formal commitment hints at fractures within the alliance, which could impact its ability to hit its targets, let alone cut further if necessary.”
And UBS’ Giovanni Staunovo noted, “… the OPEC+ production cuts are ‘voluntary’ cuts, not part of an OPEC+ agreement. Hence, the concern is that a large fraction of it could be a pledge on paper (with) effectively (fewer) barrels being removed from the market.”
Goldman Sachs called the additional cuts “a temporary response to inventory builds and production growth (elsewhere). The bank’s analysts also noted that the additional cuts are voluntary, meaning that any further output reductions would be even more challenging to agree on, Bloomberg reported.
The cuts “will not stop a billowing cloud of confusion that is going to take the oil market weeks and months to figure out, and only if the self-reporting data is indeed reliable,” PVM analyst John Evans told media.
Markets are also closely monitoring the weakening global manufacturing activity and its impact on crude demand. U.S. manufacturing remained subdued, and factory employment fell in November, Reuters reported. Economic struggles in China also play a role in tamping down forecasts for global crude demand.
“Once the dust settles, these initiatives may be enough to sustain the price of Brent in the $80s, but with the U.S. economy heading for a semi-hard soft landing and China still struggling, the focus on weakening demand will be stronger than on this attempt by OPEC+,” Saxo Bank’s head of commodity strategy Ole Hansen told Reuters.
And despite ominous clouds on the crude horizon, a glut-like situation seems to be emerging. Inventories of U.S. crude have gone up to 440 million barrels, according to Rystad Energy. This is 20 million barrels higher than a month ago.
The U.S. is reportedly also poised to extract more oil than ever. U.S. crude production in September rose to a new monthly record of 13.24 million bpd, the U.S. Energy Information Administration data showed on Thursday.
This means that, due to output restraint, OPEC is losing market share to competitors. How long OPEC+ could sustain this policy and what its repercussions would be in the longer run remain causes of concern to oil producers and analysts.
OPEC+ also seems to have failed to bring its house in order. A mini-revolt continues to rage within its ranks. Despite earlier indications, it does not appear that OPEC+ is about to settle its dispute on output quotas with its African members.
Angola, one of the dissidents within OPEC+, not only didn’t announce an additional voluntary cut but publicly rejected its current quota and reiterated its proposal for a 1.18 million bpd quota beginning in January. It added that it will not stick to the new OPEC quota. In fact, no sub-Saharan African members offered additional voluntary cuts.
To be fair, OPEC+ is no longer the sole arbiter of global energy dynamics. There are many other factors in the global crude demand and supply equation, that are beyond OPEC’s control. OPEC’s capacity to influence the oil markets has dwindled.
Toronto-based Rashid Husain Syed is a highly-regarded analyst specializing in energy and politics, with a particular emphasis on the Middle East. Besides his contributions to both local and international newspapers, Rashid frequently lends his expertise as a speaker at global conferences. His insights on global energy matters have been sought after by organizations such as the Department of Energy in Washington and the International Energy Agency in Paris.
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