After a chaotic day of decisions at the OPEC+ meeting, which resulted in an additional ‘voluntary’ cut between cartel members, the dust is now settling and the market is quite disappointed, with Brent counter-intuitively falling immediately after the announcement before rising slightly early on Friday.
The cuts mean that the surplus everyone was predicting for the first quarter of 2024 has now disappeared. In its place will be a deficit, albeit a small one.
ING Bank sees this coming first-quarter deficit as giving oil prices a bit of a boost. With this in mind, ING sees some upside to its current forecast of $82/bbl for the quarter and $88/bbl for the full year 2024.
Whether there is any upside, says ING, “depends largely on how OPEC+ goes about unwinding these cuts and, of course, how demand develops next year”.
Normally, this upside would have manifested itself immediately after Thursday’s announcement. Instead, the market reacted in the opposite direction, most likely due to the nature of the cartel’s output cuts.
The fact that the cuts are voluntary removes some of the sting.
“These voluntary cuts suggest that it is becoming increasingly difficult for members to agree on OPEC+ cuts,” writes ING. “Therefore, if further action is needed in the future, it will be increasingly difficult for the group to respond.”The meeting got off to a rocky start, being delayed for four days as African members of the cartel haggled for higher quota targets, while the Saudis bore the brunt of the latest cuts. By the time things were finally sorted out, the final decision on increased production cuts had lost its weight because it was all voluntary.
In other words, the cartel seems to have lost the essence of a cartel and replaced it with a kind of gentleman’s agreement that may or may not have any impact on the markets.
If the markets were looking for direction here, they didn’t get it.
Specifically, eight members of the expanded cartel announced voluntary cuts of around 2.2 million barrels per day for the first quarter of next year. This volume already includes Saudi Arabia’s current voluntary cuts of 1 million barrels per day and Russia’s voluntary cuts of 500,000 bpd. That leaves “additional” “voluntary” cuts of less than 900,000 bpd that haven’t yet been priced in. Additional voluntary cuts have been pledged by Iraq, the UAE, Kuwait, Kazakhstan, Algeria and Oman.
As for the African nations – notably Angola and Nigeria – which have been operating at reduced capacity of late but were reluctant to see their production quotas cut further, Angola saw its quota cut to 1.1 million bpd and Nigeria saw its quota raised to 1.5 million bpd. Angola, however, says it won’t comply with the quota, further undermining the cartel’s authority. Had the cuts been agreed by the entire group of OPEC+ members, they would have had a far greater impact on oil prices. Instead, the eight individual members were given a long leash to decide on their own in a non-binding manner. As it stands, the less than 900,000 bpd to be voluntarily taken off the market in the first quarter may never happen. If the markets are strong, those barrels will simply be put back on stream.
The New York Times summed up the emerging situation when it described OPEC as “losing power in the oil market at a time when oil is losing power with cost-conscious and climate-conscious consumers”, noting that US production accounted for a whopping 80% of the increase in global oil supply this year.
What Thursday’s OPEC+ meeting reveals is the true nature of the cartel’s power to move markets.
About a month before Thursday’s meeting, the Cato Institute argued in a lengthy report that OPEC as a whole is all about politics, not oil fundamentals. It’s a convenient bit of political leverage, with “evidence” suggesting that “the attention paid to OPEC is mostly about political benefits for both OPEC members and Western leaders”. In other words, it’s not about “an actual ability to control the oil market”. OPEC members, the Cato Institute notes, view oil production as an “international bargaining chip”. This “perception of leverage” over the West, in turn, gives it a certain legitimacy. But the West also benefits because this same perception of influence allows it to scapegoat OPEC when oil prices are hypervolatile. This theory supports the New York Times’ observation that most of the additional oil supply this year has come from the U.S. It also negates the theories behind the push for “NOPEC” (No Oil Producing and Exporting Cartels), for which a group of bipartisan U.S. senators reintroduced legislation in March. If passed, it would amend US antitrust law to remove the sovereign immunity that protects OPEC+ members from lawsuits over price-fixing.
Thursday’s OPEC+ decision on voluntary cuts, which largely suggests that it’s now every cartel man for himself, could further undermine the “legitimacy” on which the above charade rests.
