OPEC+ disappointed the oil bulls last week by announcing voluntary cuts from several producers and failing to agree on a group-wide supply reduction, at least for the first quarter of 2024, when demand is typically at its lowest.
The alliance and its most prominent members, Saudi Arabia and Russia, rushed to calm the market – where oil prices were already sliding following the underwhelming meeting last week – that OPEC+ could intervene again and extend or deepen the cuts should supply and demand balances warrant it.
The OPEC+ cuts were already baked in the price of oil, and a week after the alliance's meeting, prices hit a six-month low on Wednesday amid swelling U.S. inventories, concerns about the Chinese economy, and fears of weakening global oil demand growth.
OPEC+ has to contend with all those bearish signals and with a market currently focused on demand instead of on supply.
U.S. Gasoline Prices Fall to 11-Month Low
What's Next from OPEC+
Saudi Arabia's Energy Minister, Prince Abdulaziz bin Salman, told Bloomberg on Monday that the OPEC+ production cuts could extend beyond March 2024 if the market requires it.
The Saudi energy minister also criticized commentators for failing to understand the output deal and suggested that this would change once "people see the reality of the deal."
"I honestly believe that the 2.2 million will overcome the usual inventory build that usually happens in the first quarter," Prince Abdulaziz bin Salman told Bloomberg, referring to the overall OPEC+ cuts for the first quarter of 2024, which include Saudi Arabia rolling over its voluntary cut of 1 million barrels per day (bpd).
Prince Abdulaziz bin Salman's remarks were echoed by Russia's top oilman, Deputy Prime Minister Alexander Novak, who said on Tuesday that the OPEC+ group is ready to take additional measures and deepen the oil production cuts to avoid volatility and speculation on the market.
Since "stability" is the preferred OPEC+ word for supporting oil prices, the alliance could attempt to intervene again if prices slide further and demand disappoints.
But as last week's meeting showed, disagreements within OPEC+ run deep, and a unanimous decision could be even more difficult to reach next year.
OPEC+ Key to Oil Prices
At any rate, the oil market management from OPEC+ would be key to where prices will go next year, Warren Patterson, Head of Commodities strategy at ING, wrote in a note earlier this week.
"The outlook for the oil market largely depends on OPEC+ policy," Patterson said.
The cuts announced last week would be enough to erase the previously expected surplus on the market for the first quarter of 2024, according to the bank.
"However, our balance still shows a small surplus in 2Q24, which means that the market is largely balanced over 1H24. This could and will likely change depending on how OPEC+ members go about unwinding these voluntary cuts," Patterson said.
ING sees Brent Crude trading in the low $80s early next year, while it forecasts Brent to average $91 per barrel over the second quarter of 2024 when the market will return to deficit. [if !supportLineBreakNewLine] [endif]
But OPEC+ Faces Many Variables in Controlling Prices
A week after the OPEC+ meeting and the latest announcements of production cuts, oil prices have lost around 10% as the market was expecting a larger supply reduction and had already priced in some sort of cuts.
Concerns about the Chinese economy, soaring U.S. crude oil production, and rising U.S. commercial inventories and crude exports have all weighed on prices. WTI slipped on Wednesday below the $70 a barrel threshold for the first time since July, and Brent slipped to below $75 per barrel—for the lowest settlement since June.
OPEC+ now faces the same old dilemma – how to counter surging U.S. production and prevent it from unraveling the efforts of the alliance to prop up prices.
Non-OPEC+ supply is growing at a faster pace than previously forecast and is being led by record U.S. crude oil production, which continued to soar despite a flat or falling rig count compared to this time last year.
Record-high U.S. oil production is a "huge problem" for OPEC+, Paul Sankey at Sankey Research told CNBC after last week's OPEC+ meeting.
U.S. crude oil production hit a new monthly record of 13.236 million bpd in September, according to the latest data from the EIA released last week.
Demand is also seen currently as a bearish factor for oil prices, especially demand early next year. Concerns about the world's two largest economies dominate market sentiment.
Just this week, credit rating agency Moody's changed the outlook to negative from stable on China's government credit ratings, expecting higher financial support needed to prop up the economy to weigh on government finances.
"The outlook change also reflects the increased risks related to structurally and persistently lower medium-term economic growth and the ongoing downsizing of the property sector," Moody's said, explaining the negative outlook, which is a warning for a credit rating downgrade.
The degree to which the U.S. and its allies will be willing to toughen up the enforcement of the sanctions on the oil exports of Russia and Iran next year will also affect oil prices.
OPEC+ will have to factor in many variables in its market-managing policies next year, including a fresh threat to its market share from soaring U.S. and non-OPEC+ production.
By Tsvetana Paraskova for Oilprice.com