As the global energy demand cools due to climate and economic slowdown factors, and with the U.S. supplying ample crude oil leading to significant inventory growth, the market's concern over a production gap in the fourth quarter has eased. This situation raises questions about the impact of the upcoming OPEC+ meeting on oil prices.
With only three days left until the OPEC+ meeting on November 30, uncertainty remains over whether the member countries will agree on further production cuts. International oil prices have continued to fall, with WTI and Brent crude futures declining for four consecutive trading days. As of this writing, both Brent and WTI crude have fallen nearly 1%, with Brent down over 16% from its September peak and WTI crude more than 25%.
Reports indicate internal discord within OPEC+ over production quotas for African member countries, leading to the postponement of the last meeting of the year, originally scheduled for last Sunday, to November 30.
In the past year, whenever oil prices have fallen, OPEC+ has seemed to respond with production cuts, but these measures have had limited success in boosting oil prices.
The market generally believes that OPEC+ will maintain its current production cut plan at this meeting. Saudi Arabia and Russia are expected to extend their unilateral oil production cuts at least until the end of the first quarter of 2024. However, many analysts believe there is little room for further cuts, though it remains a possibility.
After several rounds of cuts, Saudi Arabia's crude oil production in October dropped to 8.99 million barrels per day, lower than during previous periods of sustained cuts to stabilize oil prices.
Weak Demand and Ample Inventory
Analysts generally attribute the recent decline in oil prices to two main factors: overall weak global crude oil consumption demand and an unexpected rise in U.S. crude oil inventories. On one hand, the global manufacturing PMI index has been in a downward trend in a high-interest-rate environment, falling below the boom-bust line for 14 consecutive months. The October manufacturing PMI index continued to slide significantly to 48.8%, reflecting overall weak global manufacturing production demand, thereby suppressing oil prices.
On the other hand, U.S. crude oil inventories have replenished at a rate far exceeding market expectations due to weak demand. According to the latest EIA data, as of the week of November 17, U.S. commercial crude oil inventories increased by 8.7 million barrels, with total U.S. crude oil inventories replenishing to 799 million barrels. Two months ago, the total U.S. crude oil inventory was only 763 million barrels, meaning the U.S. has been replenishing about 600,000 barrels of crude oil per day during this period.
Currently, U.S. commercial crude oil inventories (excluding strategic reserves) have risen to 448 million barrels, an 8.2% increase from the September 29 low point of 414 million barrels.
Saudi Arabia's Response at the Meeting
HSBC analysts noted in a report released on November 27 that while oil prices have been weak over the past month, OPEC+'s market share is being eroded by non-OPEC countries. This puts Saudi Arabia and other OPEC+ countries in a difficult position at the upcoming online meeting on November 30.
HSBC believes that OPEC+ is likely to confirm its existing production cut plan, with Saudi Arabia expected to extend its voluntary production cuts until the end of the first quarter of 2024. However, the organization has limited room for further cuts:
HSBC points out that the likelihood of Saudi Arabia or OPEC+ making further cuts is low for four reasons: (1) The existing scale of cuts has left OPEC+ with a spare capacity of 5 million barrels per day (5% of global demand); (2) The sustainable capacities of Saudi Arabia and the UAE are continuously increasing; (3) Some member countries, including the UAE and Russia, are not fully complying with production discipline; (4) Saudi Arabia's willingness to continue unilateral cuts is low:
Ample Spare Capacity:
Including voluntary cuts by Saudi Arabia and Russia, OPEC+ has announced a total reduction of 5.16 million barrels per day, equivalent to 5% of total oil demand. The last time Saudi Arabia had a spare capacity of over 300 barrels per day was from May 2020 to June 2021. At that time, global oil demand was about 94-95 million barrels per day, far lower than now.
Increase in OPEC+ Capacity:
Saudi Arabia and the UAE are implementing plans to significantly increase their sustainable capacities: Saudi Arabia is raising its capacity from 12 million to 13 million barrels per day, while the UAE is increasing its capacity from 4 million to 5 million barrels per day, both aiming to complete by 2027.
Failure to Comply with OPEC+ Quotas:
Given the failure of some OPEC+ countries, particularly the UAE and Iraq, to comply with the agreement, Saudi Arabia is unlikely to be willing to unilaterally further reduce production. Media reports suggest that Saudi Arabia's dissatisfaction with the production levels of other member countries has led to difficulties in negotiations, contributing to the postponement of the OPEC meeting from the initially planned November 25-26 to November 30. Another reason is the dissatisfaction of African OPEC members (Nigeria and Angola) with their baseline and quota allocations.
HSBC frankly states that Saudi Arabia's determination to defend oil price floors will face more severe tests in the coming years. The continuous increase in crude oil supply from non-OPEC countries will squeeze the market share of OPEC+ countries and could potentially lead to an oversupplied oil market. Therefore, Saudi Arabia may call on OPEC+ countries to extend production cuts until 2025 to balance the oil market.
Saudi Arabia's Diminishing Influence?
The reaction of oil prices to Saudi Arabia's production cuts suggests a continuous loss of market share, and the continuous production cuts have not effectively boosted oil prices, making it a thankless task.
The debate within OPEC+ over whether to prioritize oil prices or market share is intensifying. Major countries have their considerations, and smaller countries have their calculations.
The OPEC monthly report shows that in October, OPEC's crude oil production increased by 80,000 barrels per day. Production increases in Angola, Iran, Nigeria, and Iraq added to the supply pressure. Iran, exempted from quotas due to U.S. sanctions and having resolved pipeline issues, increased its production to 3.115 million barrels, becoming a major contributor to the increase.
Wall Street Watch analysis points out that oil-producing countries naturally do not want to see a decline in oil prices. However, African member countries, including Nigeria and Angola, with significantly lower oil production than Saudi Arabia and less influence in the oil market, tend to be price followers. Therefore, it's hard to say how motivated they are to maintain high oil prices through production cuts. Their production discipline is difficult to constrain, especially considering their own financial and economic pressures. They are more inclined to increase production or make smaller cuts, compensating for price with volume to boost oil revenue.
Although Saudi Arabia has continuously set an example in supporting oil prices, it's clear that other OPEC members have their own agendas. Analysts say the continuous decline in oil prices indicates that OPEC+ has not improved the market's perception of its cohesion and efficiency. OPEC+ might need to provide a strong and surprising move to reassure the market.
Industry insiders, including star hedge fund manager Pierre Andurand, warn that if Saudi Arabia and Russia merely extend their current unilateral daily production cuts of 1.3 million barrels into early next year, oil prices could fall.
