If OPEC+ decides to extend output cuts, it may have to do so at the expense of more market share.¹⁾

However, the more weakness we see in the market, the greater the risk that OPEC+ scraps its output cuts in an attempt to push out other non-OPEC producers from the market.²⁾

Lower prices mean lower revenues for OPEC members and so as prices weaken there will be growing pressure to pump more in an attempt to try maintain revenues.³⁾

Until now, Dubai spreads had been trading in the opposite structure, known as backwardation, all year. That was a result of supply curbs from OPEC+, which reduced supplies of the heavy sulfurous — or sour — crude pumped in the Middle East and shipped mainly to Asia.

The world's production capacity surpasses global demand; only output cuts by Gulf producers and allies, including Russia, are keeping markets tight.⁴⁾

I don’t think that giving up the quest for triple-digit prices is a mistake. As I have argued before, pumping more now can be advantageous: short-term pain for long-term gain. First, OPEC+ isn’t facing a price crash, only a limited price drop. Second, somewhat lower prices could help it in the long-term: by easing global inflation and therefore prompting lower interest rates and higher economic growth in emerging economies; and by removing the implicit subsidy that OPEC+ was granting to its US shale rivals.^{5) 6)}

The lack of compliance by some members only reinforces the view that OPEC+ could struggle to continue with full cuts into 2025 if needed.^{7) 8)}

So it extended most of its cuts, although it agreed to grant the UAE a higher production baseline meaning more production, beginning from January next year. The higher baseline adds 300,000 bpd to the UAE’s quota.⁹⁾

Analysts at Standard Chartered Plc warn that bearish Brent positions “stand out enough to represent a target for OPEC+ policymakers,” who may consider taking further action.

A case study

Mitglieder des großen Ölkartells Opec+ wollen ihre Produktion im ersten Quartal des kommenden Jahres weiter reduzieren. Nach einer Online-Sitzung teilte die Gruppierung mit, dass die Ölgiganten Saudi-Arabien und Russland ihre bestehenden Einschränkungen von insgesamt 1,3 Millionen Fass (je 159 Liter) pro Tag bis März beibehalten. Sechs weitere Mitglieder des Verbundes würden ihre täglichen Fördermengen im nächsten Quartal zusätzlich um fast 700 000 Fass Rohöl drosseln, hieß es.

Die Ölpreise fielen trotz der Kürzungen. Ein Barrel der Nordseesorte Brent zur Lieferung im Januar kostete gegen Abend 81,50 US-Dollar (74,79 Euro). Das waren 1,38 Dollar weniger als am Vortag. Der Preis für ein Fass der amerikanischen Sorte West Texas Intermediate (WTI) fiel in ähnlichem Ausmaß auf 76,60 Dollar. Hintergrund dürfte sein, dass sich nicht alle 20 Länder der Opec+ an der Angebotsreduktion beteiligen. Marktbeobachter mutmaßten, es fehle an Einigkeit.

“Cut size is smaller than expectation … simply it is just a rollover,” another Asian refiner said.

The Saudis will be happy to see Brent trading back above US$80/bbl with their additional voluntary cut of 1MMbbls/d starting to have its desired effect. However, the broader OPEC+ cuts are leading to some distortions within the market (tightness in medium sour crudes) and this is evident in the unusual discount that Brent continues to trade at relative to Dubai.

OPEC+ cuts, and in particular additional voluntary cuts from Saudi Arabia, mean that the market is drawing down inventories.

When OPEC decides to reduce production, it first reduces production of cheaper, heavier crude oil, reducing supply and increasing prices, thus closing the gap between heavy and light crude. ¹⁾

OPEC+ may rescind some previous cuts to avoid losing market share to non-OPEC producers.¹⁰⁾

“Das niedrigere Preisniveau dürfte disziplinierend auf die Länder wirken, die Produktionskürzungen strikt umzusetzen”, erwarten die Rohstoffexperten der Commerzbank (ETR:CBKG).

“Price weakness increases the likelihood that OPEC+ members will fully rollover their 2.2m b/d of additional voluntary cuts into the second half of the year, which risks overtightening the market later in 2024, assuming no downside surprises on the demand side,” ING strategists Warren Patterson and Ewa Manthey wrote in a note on Thursday.¹¹⁾

OPEC+ is continuing to curtail output in order to support oil prices, creating a drag on the volume of oil at sea, which is below the level it was at a year ago.¹²⁾

none OPEC+ wide cuts

A concern for the market is the fact that these announced cuts were voluntary rather than OPEC+ wide cuts. These voluntary cuts suggest that it is becoming difficult for members to agree on OPEC+ cuts. Therefore, if further action is needed in future, it will become increasingly difficult for the group to respond.

“Voluntary cuts don’t have much weight I feel … The market will need to see these cuts, or it will sell off,” a trade source said.

But the last two rounds of voluntary cuts were made outside the coalition’s formal meetings, and there’s no reason why any extra steps this time around shouldn’t follow a similar pattern.