Analysis of Oil Prices After OPEC+ Meeting

In a surprising turn of events, oil prices have experienced a sharp decline following a highly anticipated OPEC+ meeting. Despite major oil producers pledging additional production cuts for the first quarter of next year, skepticism has arisen due to the voluntary nature of these reductions.

The market had hoped for a unified agreement on cuts, but it appears that each voluntary contributor will have the autonomy to determine their level of reduction. This raises concerns about the discipline and effectiveness of these cuts, according to Stewart Glickman, an energy equity analyst at CFRA Research.

Initially, the group of major oil producers did not mention any additional reductions in production levels during their statement at the end of the ministerial meeting. However, a subsequent press release detailed the voluntary cuts announced by OPEC+ members. These voluntary cuts would amount to over 2 million barrels per day (mbd). The breakdown includes a 1 mbd extension of cuts by Saudi Arabia and a 300,000 barrel per day reduction in crude supplies by Russia. Additionally, Russia plans to reduce fuel exports by 200,000 barrels per day starting in January.

Prior to the meeting, news reports had suggested that the group had agreed in principle to an additional production cut of up to 1 mbd, in addition to the voluntary cut by Saudi Arabia. The lack of detail in the initial OPEC+ news release regarding the voluntary cuts may have led to disappointment among traders.

According to Anas Alhajji, an independent energy expert and managing partner at Energy Outlook Advisors, the voluntary cuts are separate from the organization or the coalition. Each country has individually announced their pledge for voluntary cuts.

Overall, despite the announcement of additional production cuts, doubts remain about their implementation and impact on oil prices in the near future.

Voluntary Cuts in Oil Production: A Step Towards Market Stability

The Organization of the Petroleum Exporting Countries and its allies (OPEC+) have announced additional voluntary cuts in oil production, building upon the ones previously announced in April 2023. These new cuts, which are derived from the required production level set for 2024 during a meeting on June 4, 2023, aim to support market stability. However, there are concerns about the compliance levels of smaller countries within the coalition.

Robbie Fraser, manager of global research and analytics at Schneider Electric, emphasized that the commitments for these cuts would come from a “broader coalition of smaller members.” This poses a challenge, as the compliance rates of smaller countries tend to be lower compared to larger members like Saudi Arabia and Russia.

In light of this, oil prices experienced a significant decline from their daily highs. The January West Texas Intermediate crude fell to $75.71 a barrel on the New York Mercantile Exchange, down from its session high of $79.60. Similarly, the January Brent crude was at $82.81 a barrel on ICE Futures Europe, down 29 cents.

OPEC acknowledges concerns regarding demand in 2024. However, uncertainty remains about whether the voluntary contributors will indeed follow through with these cuts. According to CFRA’s Glickman, skepticism lingers regarding their compliance moving forward.