By Clyde Russell
LAUNCESTON, Australia- The additional crude output cuts by OPEC+ should do two things, and neither of them are likely to please the group of oil exporters.
Firstly, the reduction of about 2.2 million barrels per day (bpd) for early next year should put to rest the idea that global demand growth for crude is strong.
Secondly, it should beg the question as to if this is effectively OPEC+’s last roll of dice, and whether the group can actually cut any more if the price of oil continues to soften.
OPEC+, which consists of the Organization of the Petroleum Exporting Countries and allies such as Russia, met on Thursday to discuss supply policy, having delayed the meeting from Nov. 26 in an apparent attempt to reach agreement.
What the group did agree was total production curbs of 2.2 million bpd from eight members, a figure that includes an extension of the existing voluntary Saudi and Russian cuts of 1.3 million bpd.
The market reaction to the OPEC+ statement was subdued, with benchmark Brent crude futures giving up their earlier gains to end at $82.85 a barrel on Thursday, down slightly from the previous close of $83.10.
The price action most likely reflects the market view that the OPEC+ action is probably not enough to tighten the global supply-demand balance in the first quarter sufficiently to spark a rally.
It also may show a certain degree of skepticism of the voluntary nature of the additional production cuts, which raises questions as to whether they will actually be delivered.
The broader picture for the crude oil market is whether OPEC+ is doing enough to maintain prices above $80 a barrel, which is likely to be the minimum preferred price for the bulk of the group’s members.
The extension of Saudi Arabia’s voluntary 1 million bpd output cut, in place since July, and of Russia’s 300,000 bpd reduction, and the additional 900,000 bpd for other members brings the total cuts pledged by OPEC+ to about 5 million bpd.
This level of production curtailment does very little to support the bullish case for global demand growth this year, which OPEC and the International Energy Agency (IEA) are still forecasting.
It’s also important to work out what is the most important determinant of oil prices in the longer term, outside of short-term moves based around news headlines.
Is it demand forecasts, stated or targeted production levels, or the actual volumes of crude oil moving around the world.
The price of crude is set by the seaborne market, and therefore largely ignores the impact of crude produced and consumed domestically, or even oil transported over borders by pipelines. – Reuters
