Oil prices plunge over 2% after OPEC+ output cut missed expectations

• Active pump jacks increase pressure to draw oil toward the surface at the South Belridge Oil Field on February 26, 2022 (AFP)

Oil prices took a significant tumble on Thursday, plummeting by over 2% in response to the OPEC+ group's decision to implement voluntary oil production cuts^[1] for the first quarter of the upcoming year, which fell short of the expectations prevailing in the market.

The Brent crude futures contract for January concluded at 27 cents, or 0.3%, lower, settling at $82.83 per barrel, marking a 5.2% loss for the month. On the other hand, the February contract, set to become the front month on Friday, experienced a more substantial decline of $2.00, equivalent to 2.4%, closing at $80.86.

Meanwhile, US West Texas Intermediate (WTI) crude futures followed suit, settling down $1.90, or 2.4%, to $75.96, with November witnessing a decrease of 6.2%.

Read more: Russia, Venezuela to resume, double oil production^[2]

The decision taken by key OPEC+ members, including Saudi Arabia and Russia, who together account for over 40% of global oil production, was to implement voluntary production cuts, nearly reaching 2 million barrels per day (bpd) for the first quarter of 2024.

However, it became apparent that at least 1.3 million bpd of these cuts were essentially an extension of the voluntary reductions that Saudi Arabia and Russia had already been implementing. Earlier discussions had suggested the possibility of additional cuts of up to 2 million bpd.

On November 13^[3], OPEC released a monthly report announcing that it expects an increase in global oil demand by 2.5 million bpd, pushing overall demand to 102.1 million bpd.

This, alongside expanded oil cuts, is expected to raise oil prices, a result that Saudi Arabia has been actively seeking in 2023. 

Reflecting on the outcome, Callum MacPherson, head of commodities at Investec, remarked, "For now, the outcome does not live up to the expectation... in recent days."

What left investors less than enthused was the voluntary nature of these cuts.

James Davis at FGE commented, "From what we’ve seen so far, this looks like a paper cut of around 600-700,000 barrels per day (bpd) vs Q4 2023 planned levels. It could at best be an actual cut of around 500,000 bpd compared to Q4. This might be just enough to keep the market balanced in Q1, but it will be close."

The group of oil producers, including Saudi Arabia, Russia, Kuwait, Kazakhstan, and Algeria, stated that they would gradually unwind these cuts after the initial quarter, provided that market conditions allowed for it.

This meeting, coinciding with the UN climate conference in Dubai, had initially been scheduled for the previous week but was postponed due to disagreements regarding output quotas for African producers.

Read more: Middle East situation could push oil to $157 a barrel: World Bank^[4]

In an intriguing development, OPEC+ extended an invitation to Brazil, one of the world's top 10 oil producers, to join their ranks. Brazil's energy minister expressed hope to become a member in January.

Meanwhile, the United States, the world's leading oil producer, continued to witness an increase in crude output, rising by 1.7% in September to reach a monthly record of 13.24 million bpd, as reported by the Energy Information Administration.

However, crude production in Texas, a significant contributor, experienced a marginal 0.1% dip, dropping to 5.57 million bpd, marking the lowest level since July and the first decline in production since April, according to the EIA.

OPEC originally encompassed 13 oil-producing countries, including Algeria, Angola, the Republic of Congo, Equatorial Guinea, Gabon, Iraq, Iran, Kuwait Libya, Nigeria, Saudi Arabia, the United Arab Emirates, and Venezuela continues to be referred to as OPEC or OPEC-13.

Recently, several non-OPEC countries including, Azerbaijan, Bahrain, Brunei, Kazakhstan, Malaysia, Mexico, Oman, South Sudan, Sudan, and most significantly Russia, began to participate in the organization's policies to form a loose grouping known as OPEC+. It is worth noting that these countries are still considered non-OPEC countries.

Read more: Iran oil income up 35% in 2022 to $54bn: EIA^[5]

References

1. ^{^} voluntary oil production cuts (english.almayadeen.net)
2. ^{^} Russia, Venezuela to resume, double oil production (english.almayadeen.net)
3. ^{^} November 13 (english.almayadeen.net)
4. ^{^} Middle East situation could push oil to $157 a barrel: World Bank (english.almayadeen.net)
5. ^{^} Iran oil income up 35% in 2022 to $54bn: EIA (english.almayadeen.net)