Market confusion over Opec+ cuts hits oil prices

Reuters

• Prices down by 4%
• ‘Sentiment is jittery’
• Scepticism cuts will take place

Oil prices fell further on Friday after tumbling sharply when Opec+ announced more production cuts amid suspicions that quotas will not be adhered to.

Brent, the main international benchmark, traded at $80.66, down from $84.37 on Thursday, while West Texas intermediate was flat at $75.94. 

Saudi Arabia, Russia and other members of Opec+ announced on Thursday that they will curb output voluntarily by a further 900,000 barrels per day (bpd) in addition to 1.3 million bpd in production cuts implemented in July.

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Other members will also reduce their production: Iraq by 223,000 bpd; the UAE, 163,000 bpd; Kuwait, 135,000 bpd; Kazakhstan, 82,000 bpd; Algeria, 51,000 bpd; and Oman 42,000 bpd. The cuts will run from January 1, 2024 until the end of March. 

“To support market stability, these voluntary cuts will be returned gradually, subject to market conditions,” Opec said in a statement. According to reports, delegates had earlier discussed cutting 2 million bpd.

Ann-Louise Hittle, vice president of macro oils at energy consultant Wood Mackenzie, said prices are weighed down by expectations of slow demand growth in China and the US, reflecting concerns over the property sector and fears that interest rates will remain higher for longer, respectively.

“Sentiment is jittery about the prospects of economic growth and strong oil demand growth next year,” Hittle said. 

Daniel Takieddine, chief executive of forex and investment institution BDSwiss Mena, told AGBI markets had doubts about the effectiveness of Opec’s cuts and were sceptical about how individual members would put the curbs in place.

Tepid economic growth internationally also contributed to the bearish sentiment, he said: “Oil prices have been declining for more than two months as markets grapple with slowing economic growth.”

According to Iman Nasseri, managing director for the Middle East at consultancy Fact Global Energy, ensuring members’ compliance with the production targets is the major concern of investors.

The consensus will be difficult to keep because of the discontent of some African producers, such as Angola. They are unhappy their output targets are to be reduced in 2024 as a result of declining production levels. 

“Gabon has already mentioned that it may not stick to allocated quotas,” Nasseri said.

Vandana Hari, a Singapore-based founder of analyst Vanda Insights, said Opec+ needs to strengthen its cohesion to retain the market rebalancing and pricing power it has had throughout this year.

“At some point soon, Opec+ will need to be able to obtain wider participation in the cutbacks,” she said. 

However, Hari said any further downward pressure on prices from the oil demand outlook may be limited, given a recent upturn in economic sentiment, especially in the US.

Additionally, Brazil has announced it will be joining Opec+ next year.

Nasseri read this as a positive sign. “It will help to better protect the market from large imbalances due to unplanned increase in supply or shortage in supply,” he said. “The more barrels are part of this market management, the better.”