Oil Markets Focus On Upcoming OPEC+ Meeting

The Organization of Petroleum Exporting Countries (OPEC) and its partners from the Declaration of Cooperation (known as OPEC+) are scheduled to meet on Wednesday, Oct. 5. According to OPEC delegates, the ministers are currently discussing cutting the group’s total production quota by over 1 million barrels per day (bpd). Last week, delegates said they were discussing cuts of 500,000 or 1 million bpd, but sentiment now appears to have shifted in favor of a larger cut. According to the Wall Street Journal, the cut could be as much as 1.5 million bpd.

The meeting will be held in person at OPEC’s headquarters in Vienna for the first time since March 2020. This is significant, because OPEC+’s recent virtual meetings have been extremely short and have simply been affirmations of decisions that were already agreed-upon. An in-person meeting provides more opportunity for discussion, disagreement and negotiation. Because OPEC and OPEC+ operate by consensus, all members must agree to the decision. Consensus building can take more time than reaching a simple majority. Traders should be prepared in case the expected outcome does not materialize as quickly as we have become used to since the meetings went virtual in 2020.

Quotas vs. Production

If OPEC cuts its quotas by 1 million bpd or more for November, traders will need to be aware of whether this is mostly just a quota cut or whether a significant number of barrels will actually come off the market. According to Bloomberg, OPEC+ production at the end of August was 3.7 million bpd below quota. Production cuts have tended to be distributed amongst members at the same rate, so according to Bloomberg’s analysis, if OPEC cuts quotas by 1 million bpd, only 6 countries would have to curb production for a total cut of just 337,000 bpd.

However, if OPEC+ wants to actually take more crude oil off the market, certain producers—such as Saudi Arabia, UAE, Kuwait and Iraq—might have to agree to take on a larger share of the cuts themselves. This is something that the members plan to discuss at the meeting, and the decision will impact oil prices.

Market Sentiment

Oil prices ended the third quarter at a loss, which would be the first quarterly loss in 2 years. However, the oil prices have risen since OPEC+ leaked news that the group is discussing a significant production cut.

Further price increases are likely to be tempered by ongoing concerns that a global recession will hurt global oil demand. If OPEC+ agrees to cut its production quotas by anything less than the maximum amount under discussion, oil prices are not likely to respond in a significant way.

However, if the OPEC+ meeting results in an agreement that includes extra “voluntary” cuts (i.e., production cuts that some members commit to make in addition to the pro rata cuts to the production quotas) traders should expect oil prices to increase, even if these amounts seem like minor additional cuts for certain countries.