The Headquarters of the Organisation of the Petroleum Exporting Countries (OPEC) in Vienna, Austria. … [+]
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As OPEC+, a select group of Russia-led oil producers and the Organization of the Petroleum Exporting Countries (OPEC) spearheaded by Saudi Arabia, convened for its latest meeting to decide production levels on Thursday (November 30, 2023), global crude markets were waiting for a lollipop but received a fudge instead.
If references to confectionery products in relation to what OPEC+ is up to seem a tad confusing, here’s the backstory. In June 2023, Saudi Energy Minister Prince Abdulaziz bin Salman announced a unilateral and voluntary output cut of 1 million barrels per day (bpd) calling it a “Saudi Lollipop.” Faced with a declining oil prices, Riyadh it seems was prepared to a take a hit for the greater good of OPEC+.
Russia followed suit and sweetened the move by committing 300,000 bpd in cuts of its own, thereby taking the tally of barrels removed from the global market to 1.3 million bpd. And that’s where things stayed for OPEC+ without much to show for it.
With crude demand weighed down by economic headwinds, high interest rates in key markets, and concerns over industrial activity in powerhouses like China and Germany, oil futures didn’t quite hit the psychological $100 per barrel level the bulls craved.
Even geopolitical tensions failed to perk up prices meaningfully as the OPEC+ November meeting drew nearer. With dire demand sentiment requiring deeper cuts in the eyes of the bulls and the Saudis fed up with carrying the can (or should we say the barrel), things threatened to turn sour and unruly.
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The meeting itself was postponed from Sunday (November 26, 2023) to Thursday with the Saudis demanding others, especially African producers and some Middle Eastern peers, take a share of the pain in a bid for what its energy minister often describes as “balancing the market.”
Finally, OPEC+ concluded its meeting by failing to officially endorse a cut but its members offered “voluntary” cuts of their own. These could potentially add up to 2.2 million bpd with eight producers offering to reduce their output. Much of the figure would be underpinned by a rolling over of 1.3 million bpd in cuts offered by Riyadh and Moscow until the end of March 2024.
The additional 900,000 bpd of cuts include 200,000 bpd in “export reductions from Russia”, with the rest divided among six other members – Iraq (223,000 bpd), United Arab Emirates (163,000 bpd), Kuwait (135,000 bpd), Kazakhstan (82,000 bpd); Algeria (51,000 bpd) and Oman (42,000 bpd).
“Afterwards, in order to support market stability, these voluntary cuts will be returned gradually subject to market conditions,” OPEC+ added. And Brazil will join the group from January 2024.
But staring at a group with a notorious track record on compliance, the oil market didn’t quite buy it. At 14:46 EST on Thursday following the announcement from OPEC+, the Brent February contract was trading at $80.93 per barrel, down -$1.95 or -2.35%, while the West Texas Intermediate (WTI) January contract was down -$1.71 or -2.20% to $76.15 per barrel.
Let’s face it, oil is not just a story of supply but demand too. Unless demand confidence returns, there’s not much that OPEC+, a group accounting for over 40% of the world’s oil production, can do to fundamentally alter the market dynamic. Faced with such a climate, it seems a skeptical crude market came looking for at least another Saudi Lollipop and got treated to an unedifying fudge instead.
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