What Do Latest OPEC+ Moves Mean?

OPEC+ decided not to implement additional official production cuts this year and instead chose to set a lower target production for 2024, “after more than six hours of lengthy discussions among member countries”, Rystad Energy Senior Vice President Jorge Leon highlighted in a market update sent to Rigzone.

“At the same time, Saudi Arabia announced an additional voluntary cut of one million barrels per day in July that can be extended, to help shore up oil prices after crude oil dropped 16 percent in the past seven weeks to an 18-month low,” Leon said in the update.

“Additionally, all nine countries that implemented voluntary cuts in April of 1.66 million barrels per day (Saudi Arabia, Iraq, UAE, Kuwait, Oman, Algeria, Kazakhstan, Gabon, and Russia) agreed to extend the cuts by a year, until the end of 2024,” he added.

So, what does this all mean for the oil market?

Well, the latest moves will add limited short-term upside price pressure in the coming weeks, according to Rystad Energy’s projections, Leon outlined.

“The long-term price development will hinge on macroeconomic sentiment and the possible extension of the voluntary Saudi Arabian production cut beyond July,” Leon said in the update.

“The pure possibility of the Saudi production cut extending beyond July will limit downside price pressure for the rest of 2023 … Saudi Arabia was very clear in saying that these cuts could be extended,” Leon added.

In the update, Leon highlighted that Saudi crude production in July would drop to just below nine million barrels per day, which he noted is the country’s lowest level since June 2021. Leon also pointed out that that the latest Saudi cut is on top of a 500,000 barrel per day voluntary cut announced in April, which runs from May until December 2023.

“Before the latest OPEC+ meeting, Rystad’s modeling showed that even if OPEC+ were to keep its production policy in place for the rest of the year, we believed the market would tighten significantly in the third quarter of this year,” Leon said in the update.

“This would add significant upside price pressure until the end of 2023,” he added.

“The additional Saudi voluntary cut of one million barrels per day in July, with the option to extend, is likely to deepen the market deficit to more than three million barrels per day, which could add upside pressure in the coming weeks,” he continued.

Leon noted in the update that OPEC+ decided not to implement additional production cuts this year despite the increasing rumors in the run-up to the meeting that a one million barrel per day cut was being negotiated.

He also said that when seven OPEC+ countries surprised the market with the announcement of voluntary cuts of 1.66 million barrels per day in early April, oil prices increased by $7 per barrel in one week but added that this effect “completely faded away in just four weeks as macroeconomic factors again took over as the main driver of the crude oil price”.

Rystad Energy highlighted in the update that it is one of three independent research and analysis companies that OPEC+ partners with for data and production capacity estimates.

Much Will Depend on Market Reaction

In another statement sent to Rigzone, Jim Burkhard - the Vice President and Head of Research for Oil Markets, Energy and Mobility at S&P Global Commodity Insights – outlined that much will depend on how the market reacts to the voluntary Saudi cut “in light of demand and supply expectations, and market sentiment about wider issues, including the trend of the world economy, interest rates, and geopolitical events”.

“The announcement by Saudi Energy Minister Prince Abdulaziz bin Salman followed a clutch of OPEC and OPEC+ meetings in Vienna over the weekend that formally resulted in a proposed reallocation of country market shares, or quota target levels, for 2024,” Burkhard said.

“The allocation of some countries—including Russia, Nigeria and Angola—is subject to review and adjustment following assessments by secondary sources, including IHS, which is a part of S&P Global Commodity Insights,” he added.

Burkhard revealed that S&P Global Commodity Insights estimates that the Saudi cut will lower the country’s crude oil production from 9.9 million barrels per day in June to 8.9 million barrels per day in July.

“The latest Saudi cut is unilateral whereas the one announced before this in April was in coordination with several countries,” Burkhard said.

“Before that, in 2021, Saudi Arabia did cut on a unilateral basis as it has done on occasion in the past,” he added.

In the statement, Burkhard noted that the oil market faces headwinds from an uneven reopening of China’s economy, U.S. banking problems, high interest rates, and strong oil production growth outside of OPEC+ including from the United States, Canada, Brazil, Norway, and Guyana.

“In terms of world oil demand and supply fundamentals, the cut will likely expand a previously expected supply deficit in the third quarter of this year,” Burkhard said.

“Prices have been weak lately and the impact of this cut remains to be seen,” he added.

Significant Movement

In a separate statement sent to Rigzone on Monday, Walid Koudmani, the Chief Market Analyst at online investment platform XTB.com said, “the news of the OPEC+ meeting caused a significant movement in oil prices with WTI crude oil starting the week with a bullish price gap of around four percent while Brent jumped around 1.7 percent”.

“However, the price failed to break above an important resistance level and began to decline as the Asian session progressed. The price has since almost completely filled the bullish price gap but has rebounded off of the daily lows,” he added.

“The situation remains uncertain, but as demand prospects remain unclear, this development has caused some noticeable movement in prices and a shift in sentiment that may persist,” Koudmani went on to state.

At the time of writing, the Brent oil price is currently trading at $75.75 per barrel, while the WTI price is currently trading at $71.14 per barrel.

To contact the author, email andreas.exarheas@rigzone.com