OPEC+ is set to consider whether to make additional cuts when the group meets later this week, sources told Reuters on Friday.
The sharp selloff in oil prices has come despite a supply deficit due to OPEC+ cuts, in the fourth quarter and the risk of further supply disruption due to escalating tensions in the Middle East, as investors fret about burgeoning non-OPEC supply and softening demand in major economies.
Saudi Arabia, Russia and other members of OPEC+ have already pledged total oil output cuts of about 5 million barrels per day (bpd), or about 5% of daily global demand, in a series of steps that started in late 2022.
The Kingdom first made the voluntary cut of 1 million barrels per day (bpd) for July and extended it to the end of the year, as an addition to a broad supply-limiting OPEC+ deal.
“We believe that OPEC will ensure Brent in a $80-$100 range by leveraging its pricing power, with a $80 floor from the OPEC put, and a $100 ceiling from spare capacity. While higher non-OPEC supply or lower GDP are downside risks to prices, we estimate that Brent would remain close to $80 unless OPEC became less assertive.”
“Our base case scenario for the OPEC meeting is that existing cuts should be extended.
We think Saudi Arabia does have meaningful flexibility to cut further, if needed. We may see, in addition, Saudi seek to “share the load” of any potential further cuts among OPEC+ peers – a collective effort, rather than unilateral. We believe this is possible assuming relationships continue to remain strong within the group.
However, we don’t rule out a scenario of deepening the cuts by up to 1 million barrels to preemptively clear potential demand weakness in the first half of next year associated with a worse than expected DM-led (developed markets) recession.”
“Saudi Arabia and Russia have not yet confirmed whether they will extend their additional voluntary cuts…beyond December, but we expect them to do so to keep inventories low.
Market conditions would need to deteriorate dramatically to persuade most OPEC+ members to consider deeper cuts beyond what they have already agreed.”
“For 2024, the general forecasts are that global economic growth will slow. Global oil demand growth will slow and also that the need for oil from OPEC will fall…this is a bearish environment for oil.
If Saudi Arabia is to carry the burden alone, it will likely need to keep its production at around 9.0 million bpd on average for 2024, dropping it down towards 8.5 million bpd in Q1-24. This may be too much to ask from Saudi Arabia and it may demand some of the other OPEC members to step up and join in on the task to regulate the market. More specifically they would look to Iraq, Kuwait and UAE.”
“…prices are trading down at levels which will raise some concerns among OPEC members, particularly Saudi Arabia. The price weakness we are seeing means that it is increasingly likely that the Saudis will roll over their additional voluntary cut of 1 million bpd into early next year. Doing this should help erase the expected surplus and provide some support to the market.”
“I believe the Saudi cut will be extended into January provided the recent weakness in oil prices. Any sign of tapering, even if it is a gradual one, would be met with renewed selling. On the other hand, it is an intriguing proposition to contemplate, how long the Kingdom is willing to support the oil market unilaterally, something that might be a hotly debated topic at the next meeting.”
“Not sure the announcement will be done on November 26 or early December, both are possible, but at present I think with Saudi Arabia’s policy still focused on being proactive, preemptive and precautionary, their voluntary supply cuts are likely to be extended into 1Q24—given seasonally weaker oil demand at the start of every year, ongoing economic growth concerns, and the aim to support the oil market’s stability and balance.”
“We have maintained that OPEC+ are likely to maintain a relatively aggressive stance in managing market expectations and…we will not be surprised to see the voluntary reductions being extended into next year.”
(Reporting by Natalie Grover and Alex Lawler in London; Editing by Sharon Singleton)