The price of Brent crude oil dropped below $80/bbl during the first part of December, despite OPEC+ announcing additional supply cuts at its meeting held on Nov. 30.
At the meeting, OPEC+ agreed to reduce its oil production by another 700,000 bbl/d. Those cuts will come from Iraq, UAE, Kuwait, Kazakhstan, Algeria and Oman. Additionally, Saudi Arabia agreed to extend its voluntary cut of 1 MMbbl/d and Russia agreed to reduce its exports of refined products by 200,000 bbl/d in addition to its current reduction of 300,000 bbl/d. The additional production cuts were to start at the beginning of the year.
The announced production cuts, however, did not have much of an immediate impact on the oil market for several reasons. First, the market was already expecting additional cuts of the magnitude that were finally agreed to at the meeting. Second, the postponement of the meeting from Nov. 26 to Nov. 30 because of pushback from the African producers supported the perception that the level of cooperation between the OPEC+ members is waning. Third, and most importantly, the cuts were announced as voluntary, which suggests that the full extent of the cuts will not take place.
Geopolitical worries decrease
The diminishing concerns about geopolitics also reduced the impact of the production cuts. While the possibility of the Israeli-Hamas conflict expanding remains, the risk premium has evaporated because the flow of oil has not been disrupted. Likewise, while there have been some indications that the U.S. and allies are considering ways to strengthen the sanctions on the shipment of Russian oil exports, there is currently little concern that the flow of oil will be affected in any material way.
Another geopolitical situation that could affect the oil market is the dispute between Guyana and Venezuela about the Esequibo region. While still developing, the dispute is currently not expected to lead to a military conflict.
With oil prices decreasing after the announced production cuts, the current market sentiment appears to be that OPEC+ has lost, at least temporarily, control of oil prices. Certainly, OPEC+ is facing challenges in its attempts to provide upward support for oil prices.
- The robust growth in non-OPEC+ crude supply (around 2.5 MMbbl/d) including the growth in U.S. production (around 1.6 MMbbl/d) during the last two years has put further pressure on OPEC+;
- While oil demand has continued to increase during the last two years (and outstripped supply since the middle of 2023), there is a concern that demand growth will slow in 2024 because of weakness in the global economy and because of the increasing role of alternative fuels and electric vehicles; and
- Because of the concerns pertaining to supply and demand, oil traders have significantly reduced their net long positions since late September and their net long positions have fallen back to the levels of early July, prior to Saudi Arabia announcing its voluntary cut of 1 MMbbl/d.
It is our view that OPEC+ still has the ability to influence oil prices—especially in establishing a floor under oil prices—simply because OPEC+ represents around 48% of total crude oil supply. The addition of Brazil to the OPEC+ alliance (which was indicated at the Nov. 30 OPEC+ meeting) will increase the share of OPEC+ to more than 50%. Additionally, OPEC+ is the only source of spare production capacity.
Supply deficits possible
We also think the production cuts will ultimately provide support for oil prices. Prior to the announcement of the additional cuts, we were forecasting that oil demand would outstrip oil supply by around 600,000 bbl/d during the first and second quarters of 2024. As such, any additional cuts by OPEC+ will result in further supply deficits.
We are expecting non-OPEC supply to increase in 2024, but only by 1 MMbbl/d, with U.S. supply growing by 330,000 bbl/d after increasing by a projected 930,000 bbl/d in 2023. The increase in U.S. supply has occurred even though the U.S. rig count decreased by around 20% from the previous year because of increased focus on the Permian Basin, efficiency gains and greater fracking intensity (longer laterals and increased proppant loading) coupled with a major drawdown in DUC wells, which has enabled the completion count to reach pre-COVID levels. These strategies, however, will have diminishing returns in terms of increasing supply—especially with the inventory of DUCs being depleted.
Regardless, members of OPEC+ will need to keep the latest round of production cuts in place, at least through the end of the second quarter to establish the fundamentals favorable for higher oil prices and, most importantly, to convince the oil market of OPEC+’s ability to maintain cohesiveness among members. Additionally, OPEC+ must be willing to be ready to implement additional production cuts if demand growth is less robust than expected.