Opec+ cuts leave oil markets dazed and confused

Reuters/Leonhard Foeger

Oil markets have had a few days to digest the latest round of cuts and rollovers by Opec+ and delivered their verdict: we are confused.

Crude markets have been “on edge” (in the words of the International Energy Agency) since the start of the Gaza conflict, but the deliberations last week did little to resolve their uncertainty.

In fact, the immediate reaction was a sharp fall in the price of a barrel of crude, despite the headline cuts of 2.2 million barrels per day.

By Monday morning, the Brent benchmark was trading around $78, below the $80 mark which some economists regard as significant for oil producers and well off pre-meeting levels of around $84.

Normally, a cut of that size would have been the signal for an increase. But these are far from normal times.

On the plus side, Saudi Arabia and Russia – the de facto leaders of the Opec+ alliance – can feel satisfied that they have pulled off commitments to a significant reduction in future output, and held the grouping together.

All the talk before the (delayed) meeting was of the need for even bigger and more immediate reductions, as well as internal strains.

The Saudis in particular, having borne the economic brunt of the cuts all year, must have been pleased that some others are putting their shoulders to the wheel.

Iraq, the UAE, Kuwait, Kazakhstan, Algeria and Oman all stepped up, and Russia added 200,000 barrels to brings its total reduction commitment to 500,000.

So why have markets reacted in such a miserly manner?

Part of the reason seems to be the voluntary nature of the cuts, and the fact that it took so long to agree them, implying a lack of commitment on the part of the cutters.

But this overlooks the fact that all Opec cuts are “voluntary” in the sense that they are reached after discussion and consensus.

It also ignores the role that Saudi Arabia plays as an effective “enforcer” of Organisation decisions through its huge market share and spare capacity.

The temporary nature of the cuts has also been offered as a reason for the uncertainty. They will run until the end of the first quarter, after which supply “will be returned gradually subject to market conditions,” according to Opec.

That set analysts off to their spreadsheets to try to gauge the state of play in international oil markets at the end of March 2024. Some are forecasting a deficit in oil supply for that time, of around 300,000 bpd.

Opec is forecasting demand growth of 2.25 million bpd next year (and its demand projections have been among the most accurate in the past).

That implies that consumer countries will be keen to lap up all that extra supply when it comes on from the second quarter onwards.

If that turns out to be the case, and markets are rebalanced by the middle of next year, there will be some burned fingers among the “financial investors” – as speculators are known these days. They have been taking increasingly bearish positions recently.

We will not have definitive answers to these uncertainties until next spring. By then there will be harder news on the state of demand from oil consumers like China and India in 2024.

Hopefully a clearer picture will have emerged as well on the Gaza conflict and the possibility of regional escalation.

A three-month lull – even at a slightly lower price – will also give Opec time to sort out the issue of baseline quotas for some countries, like Nigeria and Angola. They are concerned about having to cut their output – even though they never actually met existing production ambitions.

Further confusion was added by the news that Brazil is joining the Opec+ grouping from next year. This was a diplomatic triumph for Opec, which has been inviting Rio de Janeiro into the club for some time.

After clarification that Brazil will not take part in any schedule of cuts, and statements from President Lula da Silva at Cop28 that he is only joining to help prepare for the end of fossil fuels, the analysts were left scratching their heads – again.

Frank Kane is Editor-at-Large of AGBI and an award-winning business journalist. He also acts as a consultant to the Ministry of Energy of Saudi Arabia