Opec+ fails to raise the price of oil.

By Maggie On Dec 4, 2023

The petroleum market prices are being adversely affected by the Organization of Petroleum Exporting Countries (Opec) and its allies’ efforts to stabilize the market.

Opec+ fails to raise the price of oil. Last Thursday, in an effort to impede further price declines, ministers of Opec+ decided to extend their ‘voluntary’ output reduction. The ‘virtual’ meeting witnessed the voluntary agreement of multiple Opec+ countries to reduce their oil production by 2.2 million barrels per day (bpd) during the initial quarter of 2024.

Saudi Arabia, the leading hydrocarbon exporter globally, will maintain its leadership position by extending a voluntary oil production cut of 1 million barrels per day (bpd) by at least three months, until the end of the first quarter of 2024. The cut was originally scheduled to expire at the end of December. The kingdom’s output will remain at approximately 9 million barrels per day until the end of March 2024, according to a source “official from the Ministry of Energy” cited by the state-run Saudi Press Agency.

Furthermore, voluntary reductions in barrel-per-day production were declared for the following countries, alongside Saudi Arabia: Russia (down from 300,000 bpd to 223,000), Iraq (down from 223,000), the United Arab Emirates (163,000), Kuwait (down from 135,000), Kazakhstan (82,000), Algeria (51,000), and Oman (42,000).

The 900,000 bpd of additional reductions in petroleum product exports from Moscow are included in the 900,000 bpd pledged on Thursday. Alexander Novak, the Deputy Prime Minister of Russia, stated that crude and products would be included in the voluntary limit.

The markets reacted negatively to the announcement and were not impressed. Late Thursday, shortly after the Opec+ decision was announced, there was a 2% decline in the pricing of both WTI and Brent grades. As of the conclusion of the business day on Friday, WTI and Brent had incurred respective losses of 2.49pc and 1.61pc on January contracts. This must have exceeded the expectations of Opec+.

Thus, an intriguing competition has begun. As of yet, adherence to the made commitments is a significant “if.” “(It) appears (oil) traders are either not purchasing the notion that members will comply or do not consider it adequate,” Craig Erlam Erlam, an analyst at data firm Oanda, told the media. Additionally, the “absence of official dedication suggests divisions within the alliance,” which may have an adverse effect on its capacity to achieve its objectives, not to mention further reductions in scope if required.

Giovanni Staunovo of UBS remarked that the additional reductions might remain on paper only: “It appears that the Opec+ production reductions are ‘voluntary’ and not in accordance with an Opec+ agreement. Concerns therefore exist that a substantial portion of it may be a mere verbal commitment, resulting in the elimination of containers from circulation.

Goldman Sachs characterized the further reductions as “a transient reaction to inventory expansion and production growth in other regions,” emphasizing the worldwide escalation in manufacturing capabilities. Bloomberg was informed by the bank’s analysts that the voluntary nature of the additional output reductions made agreement on any further reductions even more difficult.

Assuming the self-reporting data is reliable, the reductions “will not halt a billowing cloud of confusion that will require weeks and months for the oil market to decipher,” according to John Evans, an analyst at PVM and broker of oil instruments.

The markets are also closely monitoring the impact of the decline in global manufacturing activity on crude demand. Due to weak demand, global manufacturing activity remained feeble throughout the month. According to surveys cited by Reuters, manufacturing remained subdued in the United States in November, and factory employment declined. The economic challenges faced by China also contribute to the reduction in projections for worldwide crude demand.

Ole Hansen, head of commodity strategy at Saxo Bank, told Reuters, “Once the dust settles, these initiatives may be enough to sustain the price of Brent in the 1980s. However, with the US economy headed for a semi-hard soft landing and China still struggling, the focus will be more on weakening demand than on this attempt by Opec+.”

Furthermore, in spite of the presence of concerning clouds on the near term, it appears that a glut-like circumstance is also developing. The consequences for the petroleum markets are twofold. 440 million barrels of US petroleum have been added to inventories, per Rystad Energy. Twenty barrels more than it was one month ago.

Moreover, it has been reported that the United States is on the verge of producing more energy than ever before. US crude production set a new monthly high of 13.24 million bpd in September, according to data released by the US Energy Information Administration on Thursday.

This also indicates that Opec is losing market share to competitors as a result of output restraint. The sustainability of this policy by Opec+ and the potential long-term consequences of it continue to be subjects of apprehension among oil producers and analysts.

Furthermore, Opec+ appears to have neglected to organize its affairs. The ongoing mini-revolt within its ranks further complicates its objective of stabilizing the markets.

There are current indications that the resolution of the output quota dispute between Opec+ and its African members is not imminent, contrary to previous signs to the contrary. African oil producers deviate from the policies advocated by Opec.

Angola, a member of the Opec+ dissident group, not only refrained from disclosing any further voluntary reductions but also openly rejected its existing quota and reaffirmed its pledge to implement a 1.18 million bpd quota starting in January. Media reports further stated that it would not adhere to the newly established Opec quota. Indeed, none of the sub-Saharan African members proposed any further voluntary reductions.

In all fairness, it should be noted that Opec+ no longer exclusively determines the global energy dynamics. Numerous other variables influence the global hydrocarbon supply and demand equation but are outside the sphere of influence of Opec. Under the current conditions, it appears that Opec’s ability to significantly impact the energy markets is constrained. Despite Opec+’s announcements, the recent decline in oil market prices is an implicit illustration of the complex situation it is currently confronted with.