BOSTON, MA -- In a surprise decision, OPEC+ announced a 2 million b/d supply cut in November, exceeding the market expectation of a 1 million b/d cut. However, a supply cut of 2.0 million b/d will translate to only 1.08 million b/d coming mainly from Saudi Arabia (520,000 b/d), Iraq (140,000 b/d), the UAE (185,000 b/d) and Kuwait (120,000 b/d). Further cuts will come from Algeria, Gabon, Oman, and Brunei, totaling an additional 115,000 b/d. The remaining OPEC+ countries, including Russia, will not see a change in production as the new quotas are still higher than their current production levels. This agreement notably extends through 2023, but production levels can and will be modified to address changing market conditions.
Spare crude oil productive capacity is also an issue. With little left even among the largest producers, OPEC risks the inability to deal with future shortages if they were to arise. But given the assumption of recession, which should lower oil demand, concern about spare capacity seems to be a little window dressing for the deal. OPEC uses the opportunity to recalibrate the quotas and record more excess capacity marginally.
The member countries also seem to think they need to prop up the price, but the ban on Russian imports to the EU will likely do that regardless. The question that arises now is what happens in December when Russian supplies are at risk. Do the Gulf countries reverse course and provide volumes to Europe?
The US has a few ways to offset this supply cut. First would be an extension of the SPR release or delay of the "payback" of crude to the SPR. Additionally, the US can continue easing sanctions on Venezuela, bringing production and exports up by about 250 to 400,000 b/d.
“This agreement is moderately bullish for prices since the market is indeed in surplus today. Next month’s decision on OPEC+ production in December will determine if it becomes a more substantially bullish development for the winter.” Sarah Emerson, Principal, ESAI Energy
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