(Bloomberg)
The OPEC+ coalition’s grip on global oil markets is looking less secure by the day.
Crude traders have shrugged off the Nov. 30 pledge from Saudi Arabia and its allies to slash supplies by a further 900,000 barrels a day, remaining skeptical of its implementation. Despite the group’s multiple attempts to shore up sentiment in the past week, prices have crashed 11% to a five-month low.
Some of the most powerful figures in the oil world such as Saudi Arabia’s energy chief and Russia’s deputy prime minister have issued public assurances that the supply curbs could be extended beyond March. President Vladimir Putin made a rare visit to Riyadh and Abu Dhabi in a show of oil producers’ unity. All to no avail.
Traders are doubtful that the Organization of Petroleum Exporting Countries and its allies will deliver enough of the cutbacks to rein in a looming surplus. Fuel demand growth is slowing and rival supplies are climbing — especially from the cartel’s old nemesis, US shale drillers.
“The market has proved to be very disappointed in the OPEC+ measures,” said Max Layton, head of commodities research at Citigroup Inc. The measures are “not enough to prevent a gradual deterioration of the oil balance” next year.
The extra cuts announced at the Nov. 30 don’t take effect until January, and there is a precedent for the group’s actions taking some time to influence prices. The Saudis first announced their unilateral 1 million barrel-a-day production cut in June, but it wasn’t until July that a sustained rally in prices took hold.
But for now at least, the supply reductions aren’t have the desired effect. Oil prices have plunged nearly 25% since nearing $100 a barrel in London three months ago. While that move offers relief for consumers and central banks after years of rampant inflation, it poses an economic threat to the 23 nations of the OPEC+ alliance. Crude futures traded near $70 a barrel in New York on Thursday.
Global markets appear set for further weakness next year, according to the International Energy Agency, as China’s demand is muted by financial difficulties while supplies around the world swell. US crude production has soared to record levels above 13 million barrels a day, as shale explorers are re-invigorated by the support OPEC+ gave to prices earlier this year.
“Everyone’s turned negative oil, not least because the US has accelerated this year in terms of production,” Paul Sankey, founder of Sankey Research LLC, told Bloomberg television.
Cuts Confusion
Last week, the darkening outlook spurred the OPEC+ group — which had already kept millions of barrels off the market in the past year to prop up prices — to intervene again.
Yet initial price gains soon fizzled as the group’s new production levels emerged via a series of announcements from individual OPEC+ members, without the usual table of formal quotas or a concluding press conference to clarify the details.
While Riyadh committed to extend its 1 million barrel-a-day cutback through to March, no new measures were offered by the kingdom, whose immense production capacity has been the cornerstone of previous accords. Instead, big contributions came from countries such as Iraq, which has a patchy track record on adhering to quotas.
Meanwhile, Russia has continued to cloud its exact obligations by saying its supply curbs would now consist of reductions to exports of either crude oil or refined products, the latter of which are not typically subject to OPEC+ limits. Angola, after days of fractious debate, rejected its new quota entirely and insisted it would pump as much as it can.
Analysts delivered a scathing verdict. Consultant Vanda Insights branded the agreement a “confusing, entangled mess,” while Bank Julius Baer & Co. Ltd. said that its “fuzziness” could drag prices into the $70s.
Negative Optics
“The clunky optics of this OPEC+ meeting will reinforce negative market sentiments heading into the new year,” said Bob McNally, president of consultants Rapidan Energy Group and a former White House official.
It’s a marked contrast from previous OPEC+ actions, like the record 10 million barrel-a-day supply cut that revived prices from a historic crash and rescued the oil industry when demand collapsed during the 2020 Covid pandemic.
Sentiment didn’t improve when OPEC+ revealed it had successfully recruited fast-growing producer Brazil into its charter, only for President Luiz Inacio Lula da Silva to promptly explain his entry was intended to speed the group’s retirement of fossil fuels.
In the ensuing days, senior officials from the alliance made efforts to turn things around.
Saudi Energy Minister Prince Abdulaziz bin Salman told Bloomberg television on Monday that the 23-nation coalition could “absolutely” prolong the measures beyond the first quarter of next year.  The promised curbs “will happen” in full and prevent inventories rising next quarter, proving the deal’s critic’s “absolutely wrong,” he said.
Prices initially perked up after the prince’s statement, but promptly faltered again. His sentiment was echoed a day later by Russian Deputy Prime Minister Alexander Novak, and then on Wednesday by Algerian Minister of Energy and Mines Mohamed Arkab, but again to little avail.
Depressed Market
“The market seems little convinced about the petro-nations,” said Norbert Ruecker, head of economics at Bank Julius Baer  & Co. Ltd. The resulting mood is “exceptionally depressed.”
The coalition isn’t scheduled to meet again until June, and hasn’t yet set a date for the next gathering of the influential ministerial committee that oversees the cuts — something that typically happens every two months.
To revive flagging markets, Citigroup speculates that OPEC+ could call another emergency meeting before the year is out. Others ponder whether it will shift course entirely.
“OPEC’s strategy looks fragile,” because supporting prices is simply financing a tide of US shale oil, said Doug King, chief investment officer of the Merchant Commodity Fund. Riyadh is also ceding customers to political rival Iran, which has restored output to a five-year high by skirting American sanctions, said Sankey.
A “more logical plan” for the group would be to open the taps and send prices tumbling as it did in 2014, King said. That would increase demand and “meaningfully reset shale,” he said.
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