Consensus on deepening output cuts may elude OPEC at Thu meet
Informist, Wednesday, Nov 29, 2023
By Sayantan Sarkar
MUMBAI – The Organization of the Petroleum Exporting Countries will try its luck once again to balance the oil market and keep prices at desired levels when its members and allies hold a virtual meeting on Thursday, which was initially scheduled on Sunday. But the cartel may find it difficult to come to a consensus about deepening output cuts.
"This postponement indicates difficulties within the OPEC+ group to reach an agreement to cut production," Rystad Energy's Vice President Jorge Leon said in an email commentary. Leon said meetings had been postponed before, but not by as much as four days.
Some Experts Believe OPEC May Agree To Slightly Reduce Production Levels Given That An Oversupply Looms In The First Quarter Of 2024.
"Therefore, reaching a new agreement to cut production will prove to be challenging," Leon said.
Brent crude oil prices have been hovering around the $80-per-barrel mark, and had even fallen below the mark on Tuesday. The fluctuations in prices indicate that the market remains cautious ahead of the ministerial meeting of OPEC and its allies.
Some experts believe that OPEC may agree to slightly reduce production levels given that an oversupply looms in the first quarter of 2024.
"I expect OPEC+ to aim to lower its production by 0.5-1.0 million b/d (bbl per day) from current levels, at least through Q1, though for impact, it may announce a deal for all of 2024, subject to review, if the reduction is substantial," said Vandana Hari, founder and chief executive officer of Singapore-based energy intelligence company Vanda Insights.
Hari said the cartel must compare the 2024 production cut target with the current output levels to calculate the new reductions. "It would not be right to add it to the May 2023 or November 2022 rounds of cuts as the overall OPEC+ baseline is changing, and those cuts were not fully delivered," she said.
A number of African countries, including Angola and Nigeria, want their production quotas to be raised. However, Saudi Arabia is not satisfied with the production level of some countries. This has fuelled doubts about Saudi Arabia's willingness to leave its voluntary production cuts in place beyond the end of the year, and whether an agreement can be reached to reduce production.
Saudi Arabia's crude oil breakeven price is $86 per bbl, according to the International Monetary Fund. Rystad Energy's analysis suggests that the kingpin of OPEC will need to keep compromising on market share until June to achieve that price level.
OPEC and its allies have been reducing production by nearly 5 mln bbl per day since July, which includes a voluntary cut of 1 mln bpd by Saudi Arabia, which is expected to expire at the end of 2023. Commerzbank AG believes that Saudi Arabia is more than likely to continue with its voluntary cut in Jan-Mar.
"The only question is whether the cartel will be able to agree on any cuts that go beyond this. This would indeed reduce the risk of an oversupply in the first quarter," Barbara Lambrecht, commodity analyst at Commerzbank, said in a note.
"If Saudi Arabia extends voluntary cuts until April 2024 and then gradually unwinds them, oil price would average $96 per barrel in 2024," Rystad Energy's Leon said in a commentary. On the other hand, if Riyadh does not extend the cuts beyond 2023, prices are likely to average $80 a bbl throughout next year, he said.
Recent trends have shown that OPEC is reaching the limits of its power with regard to influencing the global crude oil market. The cartel's efforts to shore up oil prices a couple of times earlier this year have not yielded desired results. Barring the momentary rally, crude oil has not been able to sustain the gains chalked up after reduction in output quotas.
In April, OPEC had announced voluntary output cuts by its members, amounting to 1.66 mln bpd, on top of 2 mln bpd reductions from late 2022. Brent prices had risen by $9 to $87 per bbl in April, before quickly falling back below $80 a bbl.
It was only a month ago that crude prices rose close to the $100-per-bbl mark, and there were expectations that they would breach the psychologically-crucial barrier after the surprise attack by Palestine militant group Hamas on Israel. However, prices fell sharply due to concerns about poor demand from China, the biggest importer of crude, and as the war between Hamas and Israel did not escalate to other oil producing regions in West Asia as was expected.
At the time of writing, the price of West Texas Intermediate crude on New York Mercantile Exchange was $77.61 per bbl, while that of Brent oil on Intercontinental Exchange was $82.59 a bbl, both up by over 1?ch.
Gnanasekar Thiagarajan, head of trading and hedging strategies at Kaleesuwari Intercontinental, a Singapore-based company, said that OPEC may not take a drastic decision on Thursday given that the weakening of the dollar is likely to support prices of commodities. The dollar index has fallen sharply to 102.88 from 107 at the start of the month.
"I hope Thursday's meeting is not cancelled due to further disagreements in the cartel," Thiagarajan said. End