- Decision brings output targets to August levels
- Next meeting Oct. 5, but group says can reconvene ‘anytime’
- Many OPEC+ countries struggling to hit quotas already
Wary of a global economic slowdown, OPEC and its allies will trim their production quotas by 100,000 b/d in October, despite what appears to be a tight physical market, as the group seeks to put a floor under slumping oil prices, reports Platts.
OPEC+ countries struggling to reach their quotas
The decision, made in yet another brief meeting Sept. 5 with no extended debate, will mark the alliance’s first reduction in output targets in 22 months and return quotas to August levels, when OPEC’s 13 members aimed to pump 26.689 million b/d, while Russia and eight other partners committed to 15.414 million b/d, for a combined ceiling of 42.103 million b/d.
In practice, however, with the bulk of OPEC+ countries already struggling to reach their quotas, not much supply will be lost.
Ministers are scheduled to convene again Oct. 5 to decide on November production levels, though in a statement, they said they held the option to meet “anytime to address market developments, if necessary.”
Front-month Brent futures prices jumped to nearly $97/b in the wake of the announcement, though they later fell back to $95.78 at 1700 GMT, continuing a slide from around $123/b in June.
The cut “sends a bullish signal about a willingness to reduce output to support higher price objectives,” Platts Analytics’ Nareeka Ahir said in a note.
It comes after Saudi energy minister Prince Abdulaziz bin Salman on Aug. 22 decried a “disconnect” between the futures and physical oil markets and declared that the OPEC+ coalition could cut output, in a bid to shore up how paper prices reflected supply/demand fundamentals. His remarks were quickly echoed by other OPEC+ ministers.
“Current volatility and thin liquidity send erroneous signals to markets at times when clarity is most needed,” an advisory OPEC+ technical committee said in a report Sept. 1. “This is detrimental because, without sufficient liquidity, markets can’t reflect the realities of the physical fundamentals in a meaningful way and can give a false sense of security at times when spare capacity is severely limited and the risk of severe disruptions remains high.”
Physical vs futures
The modest cut also serves as a rejection to US President Joe Biden and other leaders of major consuming countries, who have lobbied the OPEC+ alliance for more crude supplies to loosen a tight market. Biden visited Saudi Arabia and met with Gulf leaders in July.
The decrease in quotas will occur as an International Energy Agency-coordinated release of crude from strategic petroleum reserves of some 1.5 million b/d is scheduled to end in October.
The EU’s ban on seaborne imports of Russian crude is also set to start in December, while G7 countries said Sept. 2 they will “urgently” finalize and implement a price cap on Russian oil exports.
Platts Analytics forecasts Russian crude and condensate production will fall by 1.2 million b/d between July and January 2023, to 1.5 million b/d below pre-conflict volumes.
Those looming factors, plus the prospects of higher oil consumption for power generation this winter as gas supplies are stretched, have kept physical crude prices elevated over their futures counterparts.
For example, Platts assessed November cash Dubai versus same-month Dubai futures at a premium of $5.96/b at the Sept. 5 close, up 8 cents/b on the day. But the bullish indicators have been tempered by the prospect of a global recession, spurred in large part by high energy prices.
Renewed lockdown measures in several Chinese cities have also stoked fears of a slowdown in oil demand, while on the supply side, a revived Iran nuclear deal remains in limbo.
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