By K Raveendran
Oil markets are eagerly awaiting the outcome at the forthcoming OPEC+ meeting this week, after internal troubles forced a postponement of the meeting originally scheduled for November 26. The meeting assumes great significance both for producing as well as importing countries, especially amidst assessments that a new agreement to cut production is going to be challenging. While OPEC meetings have been postponed previously as well, it is the first time that the postponement has lasted days.
The postponement itself forced a drop of more than 4 percent in the crude oil prices. Crude prices started the week by trading around $74.70 per barrel, with Brent crude dropping to around $80 per barrel. After having registered a slight increase, the first such spike in weeks, prices declined mid-week after OPEC+ postponed the ministerial meeting to November 30 to reconcile production targets in African countries.
The postponement indicates difficulties within the OPEC+ group to reach an agreement to cut production. Every member country acknowledges the need to reduce output to support prices into 2024, but the question is how to share the burden of the supply cut. It is assumed that without further cuts, prices will stay around $80 per barrel for 2024.
The 2024 production quotas decided in June 2023 included a lower production target for nine of the 23 member countries, which are Russia, Nigeria, Angola, Malaysia, Azerbaijan, Equatorial Guinea, Congo, Brunei and Sudan. Experts feel it would be difficult for these countries to accept even lower production quotas.
Despite the challenges, however, oil market specialist Rystad Energy expects OPEC+ to reach an agreement to reduce production in the upcoming meeting. This could involve further voluntary cuts from members such as the UAE, Kuwait, and Iraq. At the same time, Rystad is not ready to rule out the possibility of a deadlock.
There is a great deal of anticipation over what kingpin Saudi Arabia decides over its voluntary crude oil production cuts of 1 million barrels per day (bpd). Regardless of the path they take, Saudi Arabia’s decision on the production cuts will ultimately shape the short-term future of global oil prices.
The kingdom is balancing the desire to keep prices high by limiting supply with the knowledge that doing so will lead to a further drop in overall market share. The recent price declines could be an indicator of what may be expected at the OPEC meeting, as the Saudis have repeatedly demonstrated that their price floor is above $80 per barrel.
Saudi Arabia announced its voluntary cuts on the sidelines of that meeting, initially committing to a 1 million-bpd output cut for July. This was then extended on a monthly basis into August and September, while in early September, Riyadh announced the extension until the end of this year. Oil markets will be looking to see if Saudi Arabia extends these cuts into 2024 or if it chooses to gradually unwind them or simply let them expire at the end of this year. Whichever way it goes, Saudi Arabia’s decision will have significant implications for oil markets and, in particular, for the oil price next year.
Rystad Energy assumes the Saudi voluntary cuts will not be extended into 2024, as supply has surprised on the upside, signifying a balanced market for next year’s first quarter. More importantly, a looming market surplus of over 600,000 bpd is in sight for the second quarter. Going forward, the second half of next year is expected to show a deficit of around 450,000 bpd. This overall, Rystad expects the oil market in 2024 to be fairly balanced compared to the significant deficit of around 1.2 million this year.
The downside pressure on oil price has mounted in recent weeks, with prices falling below $80 per barrel in a severe sell-off driven by oversupply concerns. This is significantly below oil price levels right after the outbreak of the Israel–Hamas conflict that began in early October, when prices reached almost $95 per barrel. To add more fuel to the bearish sentiment, recent data shows that US commercial crude inventories have increased in the last four weeks and now stand at 440 million barrels, up from 420 million barrels a month ago.
Rystad analysis shows that, in the scenario where Saudi Arabia does not extend the voluntary cuts, market bearishness will extend with oil price will average slightly above $80 per barrel next year. On the other extreme, if Saudi Arabia extends voluntary cuts until April 2024 and then gradually unwinds them, the price would average $96 per barrel in 2024.The latest estimate from the IMF suggests a breakeven price of $86 per barrel for the Saudi oil. This would mean that the Saudis will need to keep giving away market share, at least until June 2024, to achieve that price level. (IPA Service)