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OPEC Is Likely to Extend the Production Cuts Into 2024

By OctaCommoditiesNov 28, 2023 02:00PM ET
www.investing.com/analysis/opec-is-likely-to-extend-the-production-cuts-into-2024-200643956
OPEC Is Likely to Extend the Production Cuts Into 2024
By Octa   |  Nov 28, 2023 02:00PM ET
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Will OPEC+ become more assertive and announce additional production cuts at its 36th Ministerial meeting on Thursday? Octa financial analysts share their opinion.

  • Crude oil price has declined noticeably over the past two months due to slowing global economy and weaker-than-expected demand.
  • Speculation has grown as to whether OPEC+ will step in and balance the market, propping the prices higher.
  • OPEC+ is set to meet on 30 November and may announce supply cuts.
  • The meeting was previously postponed due to disagreements inside the group.
  • A lot is at stake so the market nervously anticipates the outcome of the meeting.
  • Expect a lot of volatility ahead of the meeting as traders try to front-run the news of deeper cuts or the absence thereof.
  • Octa analysts believe that OPEC+ is likely to announce an additional reduction of supply if Saudi Arabia and Russia succeed in convincing other OPEC states of the need for coordinated and resolute action.
  • A failure to agree will push the price of crude oil lower—the Brent benchmark may fall below $76 per barrel.

Oil prices have fallen by almost 20% since late September as weaker-than-expected macroeconomic statistics stoked global recession fears, while supply worries have dissipated. Octa analysts say that it is time for key producers to step in and balance the market or else we will see lower prices ahead.

The Organization of the Petroleum Exporting Countries and Allies (OPEC+) is scheduled to hold a 36th Ministerial meeting on Thursday, 30 November. The recent price action in the oil market suggests that investors are clearly betting on a production cut. Will it happen? What would be the market's reaction if OPEC+ fails to find consensus? Let's first study the context. 

Over the past two months, crude oil has been trading in a clear bearish trend. Concerns over possible production disruptions due to renewed conflict between Israel and Hamas have only temporarily pushed the prices higher. Overall, however, the bearish sentiment has dominated the market as traders' main worry centered around the demand. Specifically, traders fear that the demand in the main oil-consuming nations could be too weak to absorb the existing supply.

‘Tensions in the Middle East are certainly keeping the traders on high alert for any potential production disruptions but overall, most traders have got used to living with this toxic geopolitical background and their initial fears over supply have now subsided. Traders have shifted their focus on the demand side, which does not look to be particularly bullish’, said Kar Yong Ang, Octa analyst. 

Indeed, crude oil prices plunged by more than 4% on 7 November, as China reported a larger-than-expected decline in exports of goods and services, signaling that the demand in the world's second-largest crude oil consumer may be deteriorating. Then, on 16 November, crude oil prices fell sharply again, with benchmark Brent front-month contract closing at $77.42 per barrel, a four-month low, in response to weak employment and industrial production figures from the U.S. However, as the OPEC+ meeting was drawing closer, the sentiment started to change and crude oil corrected to the upside on 17 November.

‘It is not uncommon for commodity prices to become overextended from time to time. Extremely bearish sentiment becomes very sensitive to any new bullish news or events. Therefore, when Reuters reported last Friday that OPEC may be considering additional production cuts, crude oil rallied strongly’, said Kar Yong Ang, Octa analyst.

Most recently, however, the crude oil prices reversed again as OPEC+ postponed its policy meeting due to a dispute with some members over production quotas. The ministerial meeting should now be held on Thursday, 30 November, four days later than initially planned. Furthermore, U.S. Energy Information Administration (EIA) thrown in a another ‘bearish bomb;, when it reported a huge inventory build of 8.701 million barrels (Mbbl) for the week ending 17 November, while analysts had expected an increase of just around 1.16 MMBbl for the period (according to the Reuters survey).

‘Last Wednesday was not a happy day for oil bulls. Not only we learned that there was a disagreement within the OPEC+ about the existing production levels, but we also got a major bearish surprise from the EIA. However, at least now we know how important the upcoming meeting is for the oil market. It is a key focus and traders are clearly positioning to see a production cut. I think if OPEC+ fails to act decisively, Brent price could drop below $76 per barrel if not lower’,  said Kar Yong Ang, Octa analyst.

OPEC+ has already committed to reducing supply by 5.16 million barrels per day (Mbbl/d): 3.66 Mbbl/d by OPEC members via official quotas and additional voluntary cuts of 1.5 Mbbl/d by Saudi Arabia and Russia. However, the combination of rising supply in non-OPEC states—particularly in the U.S. and slowing economies of the industrialized nations—continues to exert a downward pressure on crude oil prices. Thus, analysts now speculate that a deeper production cut could be discussed during the meeting on Thursday, while previous production cuts may be extended into 2024. It is not clear, however, if all OPEC+ members are willing to reduce their production further.

‘The Saudis and the Russians would have to convince the rest of OPEC members that there is a need for coordinated effort. A failure to agree to a deal will ensure that the market will be oversupplied in 2024. We have already seen some unhealthy volatility in the oil market lately. OPEC+ should finally deliver some clarity or face lower prices. I think the existing production cuts will be extended and additional cuts are highly likely to be announced’, said Kar Yong Ang, Octa analyst.

OPEC Is Likely to Extend the Production Cuts Into 2024
 

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OPEC Is Likely to Extend the Production Cuts Into 2024

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