Skepticism and Confusion: What Analysts Say About the OPEC+ Cuts

The latest bid by OPEC+ to support crude prices with additional oil-output cuts that’ll take effect from January has left market watchers skeptical about the effectiveness of the move. That’s partly because of the voluntary nature of the curbs, and partly because of their opacity.

With futures prices edging lower on Friday, here’s what analysts are saying:

Morgan Stanley: Limited Commitment

Given these cuts took such a long time to negotiate, and are not part of the formal quota, hints at only a limited commitment to implement them, according to Morgan Stanley. The impact on supply-demand balances is likely less than the headline figure suggests, analysts, including Martijn Rats said in a note.

Updated forecasts now point to a 300,000 barrel-a-day deficit in the first quarter of next year, compared with an earlier outlook for a surplus of 300,000 barrels a day. However, a small surplus is expected to return in the second and third quarters, they said. “Across next year, we see inventories building.”

Goldman Sachs: A Temporary Response

The extra cut is a “temporary response” to large rises in inventories and supply, analysts including Daan Struyven said a note. In addition, the further rise in spare capacity and the voluntary nature of the cuts imply that any additional reductions will become increasingly difficult to implement, they said, maintaining a forecast for Brent at $93 a barrel in December 2024.

UBS Group: Causing Confusion

The additional reductions should prevent an oversupplied market in the first quarter, according to Giovanni Staunovo, strategist at UBS Group AG. While OPEC+ wants to be seen in control of the market, the announcement caused confusion as it was left to individual members to issue statements on the size of their cuts. “Market participants will closely watch compliance levels.”

Rystad Energy: Bittersweet Victory

The outcome of the meeting is a “bittersweet victory” for Saudi Arabia as its inability to secure a group-wide agreement doesn’t bode well for the group’s unity and its ability to balance the market, Jorge Leon, senior vice president of oil market research at Rystad Energy, said in a note.

With the cuts, Rystad expects a deficit of about 400,000 barrels a day in the first half, with Brent set to trade between $80 and $85 a barrel in the coming months. Meanwhile, Brazil’s decision to join OPEC+ is likely to take the group’s global market share to more than 60%, a return to 2018 levels.

ESAI Energy: Unconvinced

ESAI isn’t convinced the latest round of curbs from OPEC+ is an actual, additional reduction of as much as 700,000 barrels a day. That’s because the incremental voluntary reductions for 2024 appear to come from levels agreed in June 2023, and are in addition to the other voluntary cuts agreed last April.

Bernstein: Preventing a Glut

“While the new announced cuts are voluntary and will raise questions over compliance, it’s clear the group is working to prevent inventory builds and prices much below today’s levels,” said Sanford C. Bernstein analysts including Oswald Clint and Neil Beveridge. Outside of demand shocks, and price levels look well-supported, they said.

CBA: Rising Skepticism

In an unusual move, individual OPEC+ members announced their own voluntary production cuts, a task typically carried out by the secretariat, said Vivek Dhar, director of director of mining and energy commodities research at Commonwealth Bank of Australia. “These irregularities, combined with the OPEC+ voluntary production cuts only lasting through 1Q 2024, resulted in rising market skepticism over OPEC+ delivering on their pledge.”

ANZ: Lack of Published Agreement

The absence of a comprehensive breakdown of OPEC+’s production cuts, with only a select number of countries detailing their reduction, failed to convince the market, analysts from ANZ Group Holdings Ltd., including Brian Martin and Daniel Hynes said.

“The lack of a published agreement also raises the prospect of some producers not adhering to their voluntary reductions. Nevertheless, if output is cut to the extent they promise, the crude oil market should remain tight.”

A/S Global Risk Management: Market Doubts

“The market will probably be strongly in doubt if the individual countries will actually reduce production according to the voluntary pledges, not least considering the poor communication,” said Arne Lohmann Rasmussen, head of research at A/S Global Risk Management.

As a result, OPEC’s credibility has been hurt, he said. “OPEC+, in theory, delivered more than expected today. But the market might see it as a ‘paper cut’ until data confirms that cuts are carried out, and inventories are not rising.”

Macquarie Bank: Already Discounted

The announcement from OPEC+ should blunt an otherwise very bearish fundamental picture in the first quarter of next year, but that has likely already been discounted by the market, analysts including Walt Chancellor said in a note. All told, the outcome of the meeting would “appear to represent some potential progress around more equitable burden-sharing” between Riyadh and its OPEC+ partners, they said.