Following a chaotic day of OPEC+ meeting decisions that resulted in additional “voluntary” cut among cartel members, the dust is now settling, and the market is fairly disappointed, with Brent counterintuitively falling right after the announcement before gaining slightly early on Friday.
The cuts mean that the surplus everyone was forecasting for the first quarter of 2024 has now disappeared. In its place will be a deficit, though small.
ING Bank sees this coming first-quarter deficit as lending some upside to oil prices. With that in mind, ING sees some upside in its current $82/barrel forecast for the quarter and its $88/barrel full-year 2024 forecast.
Whether there is actually an upside, says ING, “largely depends on how OPEC+ goes about unwinding these cuts and obviously on how demand plays out next year”.
Normally, that upside would have manifested itself immediately after the announcement on Thursday. Instead, the market reacted in the reverse most likely because of the nature of the cartel’s output cut delivery.
The fact that the cuts will be voluntary remove a bit of the sting.
“These voluntary cuts suggest it is becoming difficult for members to agree on OPEC+ cuts,” writes ING. “Therefore, if further action is needed in future, it will become increasingly difficult for the group to respond.”The meeting got off to a rocky start, delayed for four days as African cartel members haggled for higher quota targets, while the Saudis have been bearing the bulk of the burden of recent cuts. Once things finally got sorted out, the final decision on increased output cuts lost its weight due to the fact that everything is voluntary.
In other words, the cartel seems to have lost the essence of a cartel, replacing it instead with a sort of gentleman’s agreement that may or may not have any impact on markets.
If the markets were looking for direction here, it wasn’t forthcoming.
Specifically, eight members of the expanded cartel announced voluntary cuts of around 2.2 million barrels per day for the first-quarter of next year. That volume already includes Saudi Arabia’s current voluntary cuts of 1 million barrels per day, as well as Russia’s 500,000 bpd voluntary cuts. That leaves us with “additional”, “voluntary” cuts of less than 900,000 bpd that hasn’t already been priced in. Additional voluntary cuts were pledged from Iraq, UEA, Kuwait, Kazakhstan, Algeria and Oman.
As for the African nations–particularly Angola and Nigeria–who have been operating at diminished capacity lately–yet were loath to see their production quotas reduced further–Angola saw its quota cut to 1.1 million bpd and Nigeria saw its raised to 1.5 million bpd. Angola, however, says it won’t follow the quota, further undermining the cartel’s authority. Had the cuts been agreed across the entire group of OPEC+ members, they would have delivered a far greater punch to oil prices. Instead, the eight individual members were given a long leash to determine this on their own, in a non-binding manner. As it stands, the less-than 900,000 bpd set to be voluntarily taken off the market in the first-quarter, may never even happen. If the markets are strong, those barrels will simply be put back into the flow.
The New York Times assessed the emerging situation succinctly when it described OPEC as “losing power in the oil market at a time when oil is losing power with cost-wary and climate conscious consumers”, noting that U.S. production accounted for a whopping 80% of the rise in global oil supply this year.
What the Thursday OPEC+ meeting lays bare is the true nature of the power of the cartel to move markets.
About a month prior to the Thursday meeting, the Cato Institute opined in a lengthy report that OPEC at large is just about politics, not actual oil fundamentals. It’s a convenient bit of political leverage, with “evidence” suggesting that “the attention paid to OPEC is mostly about political benefits to both OPEC members and Western leaders”. In other words, it’s not “an actual ability to control the oil market”. OPEC members, the Cato Institute notes, view oil output as an “international bargaining chip”. In turn, this “perception of influence” over the West lends it a certain legitimacy. But the West benefits, as well, because this same perception of influence allows it to set up OPEC as a scapegoat when oil prices are hypervolatile. This theory supports the New York Times’ note that the bulk of additional oil supply this year has come from the U.S. It also negates the theories behind the push for “NOPEC” (No Oil Producing and Exporting Cartels), for which a group of bipartisan U.S. senators in March reintroduced legislation. If passed, it would change U.S. antitrust law to revoke sovereign immunity protecting OPEC+ members from lawsuits over price collusion.
The Thursday OPEC+ decision for voluntary cuts, which largely suggests that it’s now each cartel man for himself, might further erode the “legitimacy” on which the above-mentioned charade relies.
By Alex Kimani for Oilprice.com