MARKETS are reacting adversely to the attempts by the Organisation of Petroleum Exporting Countries (Opec) and its allies to shore up crude market prices.

To prevent the prices from lowering further, Opec+ ministers opted to increase their ‘voluntary’ output cut last Thursday. At the ‘virtual’ meeting’, several Opec+ countries agreed to voluntarily cut oil production by 2.2 million barrels per day (bpd) in the first quarter of 2024.

Saudi Arabia, the world’s largest crude exporter, will continue to lead the effort by extending a voluntary production cut of 1m bpd of oil — previously intended to run till the end of December — by at least another three months, until the end of quarter 1, 2024. The kingdom’s production will stay at around 9m bpd until the end of March 2024, the state-run Saudi Press Agency said, citing “an official source from the Ministry of Energy.”

In addition to Saudi Arabia, the following voluntary barrel-per-day production cuts were also announced: Russia by 500,000 (from the erstwhile 300,000 bpd); Iraq by 223,000; the United Emirates by 163,000; Kuwait by 135,000; Kazakhstan by 82,000; Algeria by 51,000 and Oman by 42,000.

The cartel seems unable to influence the crude markets much beyond a certain limit

The 900,000 bpd of additional cuts pledged on Thursday includes a 200,000 bpd reduction in fuel product exports from Moscow. Russian Deputy Prime Minister Alexander Novak said Russia’s voluntary cut would include crude and products.

Taking the announcement in a negative stride, markets were not impressed. Late Thursday, in almost the immediate aftermath of the Opec+ decision, both WTI and Brent grade prices went down by 2 per cent. By Friday evening, at the close of the working week, WTI and Brent had lost 2.49pc and 1.61pc, respectively, for January contracts. This must have been against Opec+ expectations.

An interesting game is thus on. Compliance with the commitments made remains a big if. “(It) seems (oil) traders either aren’t buying that members will be compliant or don’t view it as being sufficient,” data firm Oanda’s analyst Craig Erlam Erlam told media. It could also be that the “lack of formal commitment hints at fractures within the alliance, which could impact its ability to hit its targets, let alone cut further if necessary.”

UBS’s Giovanni Staunovo noted that the additional cuts may remain on paper only: “It seems the Opec+ production cuts are ‘voluntary’ cuts, not part of an Opec+ agreement. Hence, the concern is that a large fraction of it could be a pledge on paper and effectively less barrels being removed from the market.”

Goldman Sachs called the additional cuts “a temporary response to inventory builds and production growth (elsewhere), underlining the global increase in production capacity. The bank’s analysts also noted that the additional cuts are voluntary, meaning that any further output reductions would be even more challenging to agree on, reported Bloomberg.

The cuts “will not stop a billowing cloud of confusion that will take the oil market weeks and months to figure out, and only if the self-reporting data is reliable,” broker of oil instruments PVM’s analyst John Evans.

Markets are also keeping a close eye on the weakening global manufacturing activity and its impact on crude demand. Global manufacturing activity remained weak during the month due to poor demand. US manufacturing remained subdued, and factory employment fell in November, Reuters reported quoting surveys. Economic struggles in China also play some role in tamping down forecasts for global crude demand.

“Once the dust settles, these initiatives may be enough to sustain the price of Brent in the 80s, but with the US economy heading for a semi-hard soft landing and China still struggling, the focus on weakening demand will be stronger than on this attempt by Opec+,” said Saxo Bank’s head of commodity strategy, Ole Hansen told Reuters.

And despite ominous clouds on the crude horizon, a glut-like situation also seems to be emerging. This is a double whammy for the crude markets. Inventories of US crude have gone up to 440m barrels, according to Rystad Energy. This is 20m barrels higher than a month ago.

And, in the meantime, the United States is reportedly poised to extract more oil than ever. The US crude production in September rose to a new monthly record of 13.24 million bpd, the US Energy Information Administration data showed on Thursday.

This also means that due to output restraint, Opec is losing market share to competitors. How long Opec+ could sustain this policy and what its repercussions would be in the longer run remain causes of concern to oil producers and analysts.

Opec+ also seems to have failed to bring its house in order. A mini-revolt continues to rage within its ranks, making its goal of stabilising the markets still more difficult.

Despite some earlier indications that Opec+ is about to settle its dispute on output quotas with its African members, that does not appear to be the case now. African oil producers are not in line with Opec policies.

Angola, one of the dissidents within the Opec+, not only didn’t announce an additional voluntary cut, but it publicly rejected its current quota and reiterated its proposal for a 1.18mn bpd quota beginning in January. It added that it will not stick to the new Opec quota, media reports added. In fact, no sub-Saharan African members offered additional voluntary cuts.

To be fair, Opec+ is no longer the sole arbiter of the global energy dynamics. There are many other factors in the global crude demand and supply equation, that are beyond Opec’s control. In the given circumstances, Opec seems unable to influence the oil markets much beyond a certain limit. The recent slip in oil market prices, despite the Opec announcements, is a tacit example of the complex situation that Opec+ is faced with.

Published in Dawn, The Business and Finance Weekly, December 4th, 2023

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