Opec+ agonises over quotas but more cuts loom

Reuters

• Extended output falls likely
• Oversupply possible in 2024
• State of volatility, say experts

Opec+ members are likely to extend their voluntary output cuts through to next year at their meeting in Vienna on November 26, even if this means the oil group risks losing market share to keep prices high, analysts and economic experts said.

Brent prices held above $82 a barrel on Monday, after four weeks of declines, leaving the price of crude almost 20 percent lower than at the end September.

“The rebound was unavoidable,” Ole Hansen, head of commodity strategy at Saxo Bank told AGBI, adding that traders were speculating that Opec and its partners were on course to announce more production cuts in order to steer prices higher.

Opec+ consists of the 13 existing Organization of the Petroleum Exporting Countries members plus 10 additional oil producers, such as Azerbaijan, Bahrain, Oman and Russia. It produces around 40 percent of global crude output.

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“Opec+ doesn’t have much choice if it wants to keep crude from spiralling downwards again — it will have to extend its current cuts into 2024,” Vandana Hari, the founder of Vanda Insights, a provider of global oil market macro-analysis, told AGBI. “It may deepen them, too.”

Saudi Arabia and Russia would have to roll over their additional production and export cuts, totaling 1.3 million barrels per day (bpd) or find a way to redistribute the cuts across the wider group, Hari believed.

Justin Alexander, a director at the consultancy Khalij Economics, said quotas would be a bigger issue for the November 26 meeting, and whether adjustments will be made upwards for the UAE and downwards for Russia and some of the under-producing African countries. 

Hari said the issue was “potentially a source of friction”, and it could become another test for the cohesion of Opec+.

“Once Nigeria and Angola accept their new lower baselines, they may be asked to participate in the cuts, along with the other members that did not join in the last round,” she said.

Alexander said he believed Nigeria may see a tweak in its favour, as it has been surpassing its current quota in recent months.

Opec and the International Energy Agency have predicted that supply will tighten in the fourth quarter, and Opec expects demand to increase.

On Monday, the group raised its prediction for 2023 oil demand growth to 2.5 million barrels per day. 

Weakening demand

Saxo Bank’s Hansen said another unexpected production cut would signal demand weakness, which may harm the price more than benefit it.

Opec emphasised the US economy’s strong growth in the third quarter of 2023 and the International Monetary Fund’s upgrading of Chinese economic growth projections. 

“Global oil market fundamentals remain strong despite exaggerated negative sentiments,” it said in its monthly report.

But some key economic indicators from around the world this week showed demand was bleaker than forecast and some analysts believe there could be oversupply in 2024.

In addition, the group will have to contend with oil from non-Opec countries, such as Brazil, Guyana and Canada.

US production and exports are also growing, and Washington has loosed sanctions on Venezuelan oil, all of which brings more challenges for Opec.

The question of how much Opec is willing to sacrifice its market share to defend oil price remains, said Marc Ostwald, a London-based chief economist and global strategist at ADM Investor Services International Limited.

“There are price levels which create budgetary balances in the GCC countries,” Ostwald said, suggesting Opec is in a difficult position: “How can you extend cuts for six months while you just published the oil market report saying that the demand is going to be great?”

He concluded: “Everything at the moment is all VUCA: volatility, uncertainty, complexity and ambiguity.”