OPEC+ nations agreed to voluntarily cut oil production by 2 million barrels per day starting in January in an effort to prop up falling crude prices, but oil markets were initially unimpressed as the cuts fell short of expectations.
Cuts Less Than Expected
The voluntary cuts agreed upon at Thursday’s OPEC+ meeting in Vienna represent about 2% of global demand and are far less than the 2 million bpd to 4 million bpd that some analysts were predicting ahead of the gathering.
Most OPEC members, led by Saudi Arabia, will share the burden of the cuts equally. Non-OPEC producer Russia is contributing a symbolic 50,000 bpd reduction.
| Nation | Production Cut (bpd) |
|---|---|
| Saudi Arabia | 526,000 |
| Iraq | 185,000 |
| UAE | 150,000 |
| Kuwait | 150,000 |
| Russia | 50,000 |
The modest cuts failed to impress oil traders, who were hoping for deeper reductions to address concerns about oversupply and falling demand.
Oil Prices Decline
Oil prices fell in Thursday trading as the OPEC+ announcement initially underwhelmed markets.
Brent crude futures were down 2.2% at $86.23 a barrel in afternoon deals after reaching as high as $88 earlier. U.S. West Texas Intermediate (WTI) crude dropped 2.1% to $81.21 after rising to $83.34.
Thursday Crude Price Movements
Time (EST) | Brent | WTI
---|---|---
Open | $88.00 | $83.34
11:30 am (Production cut announced) | $87.76 | $82.82
2:30 pm | $86.23 | $81.21
The declines built on multiple days of sliding prices due to demand worries stemming from China’s renewed COVID-19 restrictions and looming economic slowdowns in Europe and North America.
Difficult Negotiations
Negotiations at OPEC+ were contentious, as the group struggled to build consensus around production policy. Talks ran late into Thursday as the alliance tried to strike a delicate balance between supporting prices while not overly tightening supply.
Key members Saudi Arabia and Russia backed the voluntary cuts, aimed at ensuring market stability. But some African producers resisted their share of reductions, wanting special consideration as they struggle to attract investment for oil projects.
Nigeria’s minister said it was unfair for OPEC to force African members reliant on oil revenue to subsidize high gasoline prices in the West through output cuts.
In the end, exemptions were made for Gabon, Congo, South Sudan, Equatorial Guinea and Nigeria, while other African producers will make "moderate" cuts.
Demand Uncertainty in 2023
OPEC+ faces a challenging market in 2023 rife with uncertainties that complicate efforts to balance supply and demand.
There are worries that China’s zero-COVID policy, European energy crunches, and high inflation and interest rates will tip major economies into recession next year – crushing oil demand.
Forecasts for 2023 global oil demand growth have already been slashed, with OPEC itself lowering its projection to 2.5 million bpd from 3 million bpd. Many expect further demand downgrades if the global economy deteriorates.
On the flip side, some predict a recovery in Chinese oil buying after COVID lockdowns ease, and developed nations could resume robust fuel consumption after what is hoped to be a shallow recession.
Cuts Extension Possible
Saudi Arabian Energy Minister Abdulaziz bin Salman said OPEC+ will remain "cautious" and could extend voluntary cuts beyond their three-month duration if market conditions warrant.
Analysts say sending such signals to the market about OPEC’s readiness to intervene if necessary helps support prices. But the alliance also wants to avoid shocking consumers with overly bullish policies.
"We remain attentive to market fundamentals and will continue to be proactive and pre-emptive to assist market stability and provide guidance," Prince Abdulaziz told reporters after the meeting.
U.S. Politics a Factor
Some suggest OPEC muted its production cuts to avoid angering Washington. Relations between the Biden Administration and Saudi Arabia are fragile after last year’s heated political exchange over oil policy ahead of U.S. midterm elections.
There are concerns aggressive OPEC supply cuts could have provoked renewed accusations of enabling higher pump prices from U.S. leaders worried about voter backlash on the economy.
But the White House actually urged caution ahead of the meeting, warning the Saudis away from large cuts. Analysts say Biden wants to keep gasoline costs low while still seeing high oil prices that sustain domestic drilling growth.
"The calculations from Riyadh must balance what works best for them versus avoiding fresh political hostility from Washington," said Bob McNally, president of consultants Rapidan Energy Group.
Industry Impact
While modest OPEC reductions may not move prices much, they signal producers are serious about defending high price levels vital for industry budgets.
Many exploration and production firms need sustained $80 oil to profit on supply growth projects critical to offsetting natural field declines. Sharply lower prices would prompt deep investment cuts.
So far industry sentiment remains fairly upbeat, with most companies planning higher spending next year. But that optimism partly hinges on OPEC’s ability to keep the market supported as clouds gather over the global economy in 2023.
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