December 4, 2022

Major oil producers meeting in Vienna on Wednesday agreed to reduce their collective crude output levels by 2 million barrels a day from next month, but that’s no guarantee prices will continue to climb.

“The market was not thrilled as the actual cut would be half the headline number,” said Manish Raj, chief financial officer at Wellandera Energy Partners. Market inspection.

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Why OPEC+ oil production cuts may be less than eye-popping

On Wednesday, oil futures traded lower following news of the decision, then moved more definitively after the Energy Information Administration reported weekly declines in US crude, gasoline and distillate supplies.

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Futures for the global benchmark Brent crude BRN00,
+0.45%

BRNZ22,
+0.45%
On Wednesday, the December contract on ICE Futures Europe settled at $93.37 a barrel, up $1.57, or 1.7%. US Benchmark West Texas Intermediate Crude for November Delivery CLX22,
+0.50%

cl.1,
+0.50%

CL00,
+0.50%
$1.24, or 1.4%, to settle at $87.76 a barrel on the New York Mercantile Exchange.

Based on front-month prices, both Brent and WTI ended at their highest prices since mid-September on Wednesday.

“Given that the conglomerate is producing well below its quota, the decline in physical supply will be much smaller, though still significant,” Carolyn Bain, chief commodities economist at Capital Economics, wrote in a report released after the OPEC+ decision. ” Capital Economics estimates the decision would cut just 1 million barrels per day, or about 1% of global supply, she said.

The Organization of the Petroleum Exporting Countries and their allies, called OPEC+, said The cuts will start in November and will be based on August 2022 production levels.

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In reaction to the move, US President Joe Biden said he was “disappointed by the short-sighted decision” to cut production quotas while the global economy continues to deal with the negative impact of Russian President Vladimir Putin’s invasion of Ukraine.

OPEC+ said it would no longer hold monthly meetings and instead meet every six months, although its next meeting is scheduled for December 4. The OPEC+ Joint Ministerial Monitoring Committee (JMMC), which reviews the oil market, will instead meet every two months. of monthly

At a press conference following the OPEC+ decision, Saudi Arabia’s Energy Minister, Prince Abdulaziz bin Salman, said the group would consistently prove that OPEC+ is “not only here to stay”, but to bring stability to the oil market here. is for.

‘Unusual’ background

“OPEC cited the uncertain outlook for the global economy as the main reason for the quota cuts,” Bain said. “However, the price drop since its peak in March undoubtedly played a role.”

She also said that “the market background for supply cuts is somewhat unusual,” with global oil stocks “historically low and, so far, high prices have failed to materially dampen demand.”

,With global oil stocks “the market backdrop for supply cuts is somewhat unusual,” historically low and, so far, high prices have failed to materially dampen demand. ,


— Carolyn Bain, Capital Economics

The reduction in production itself marks the biggest production cut since the start of the COVID-19 pandemic as concerns of a possible slowdown have increased the risk of a slowdown in energy demand.

Srijan Katyal, global head of strategy and trading services at the international brokerage, said: “With OPEC+ now holding its meetings physically for the first time since the start of the pandemic, there has also been speculation that a significant policy change is in the works. Is.” In ADSS, email commentary. “This could be a sign that OPEC+ is systematically reducing production in view of dwindling oil demand amid a weakening global economy.”

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Failed Output Quota Compliance

OPEC+ production stood at 42.84 million barrels per day in August, an increase of 260,000 barrels per day from July, According to Platts survey by S&P Global Commodity Insights Released in early September. The survey reported that April 2020 was the highest since the Coalition opened the tap to produce 47.56 million barrels per day, “after a brief price war in dispute over pandemic strategy before the historic cuts”. I had agreed.”

However, 19 countries with quotas under the OPEC+ agreement fell short of their production target by 3.61 million barrels in August, “the biggest gap in the alliance’s nearly five-year history”, according to S&P Global Commodity Insights.

Tom Kloza, global head of energy analysis at Oil Price Information Service, a Dow Jones company, told MarketWatch that the OPEC+ cut would ultimately result in only 800,000 barrels to 900,000 barrels per day because “many cartel members don’t have the proper hiking capacity.” is. output.”

Again, with the pending end of the sale of oil from the US Strategic Petroleum Reserve, “one could say that this leads to approximately 1.9 million [barrels a day] Less crude oil on the market,” said SPR sales of about 1 million barrels per day and OPEC committed to cuts to about 850,000 barrels per day in real terms.

Kloza said at the moment there is no major impact on gasoline or diesel, as those products “have their own ecology.” The steep hike in gas prices in California is over, he said, but refinery work and downtime in the Midwest need to follow.

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For now, it looks like OPEC+ production cuts will “further deepen the smaller deficit we forecast in the fourth quarter,” Capital Economics’ Bain said.

“We had always expected supply growth to slow later this year and into 2023, but this latest OPEC+ action reaffirms our view that prices will end the year slightly higher, at $100 per Brent. barrel and will expire at $92 for WTI. Said.