On Oct. 5, OPEC+ announced a two million bpd reduction in crude supply for November 2022.
ICE Brent Front Month reached $94 per barrel right after the announcement, up from $88 per barrel last Friday.
We believe that the group will not be able to deliver on the full headline cut, but instead has scope to deliver 1.2 million bpd of effective cuts as 14 out of the 23 member countries (accounting for 39% of the group’s production in September) are currently underproducing so that the new quota will not be binding.
For example, Russian production is around 9.7 million bpd but their new quota is 10.5 million bpd.
The estimated 1.2 million bpd of effective output cut for November 2022 will be mainly shouldered by Saudi Arabia (-520,000 bpd), Iraq (-220,000 bpd), the UAE (-150,000 bpd) and Kuwait (-135,000 bpd).
Kazakhstan, Algeria, Oman, Gabon, and South Sudan will also contribute.
In the official press release, the group also outlined two non-volume shifts in policy that will also be quite impactful on the oil market. Firstly, the Declaration of Cooperation was extended until the end of 2023. This adds a year of potential sturdy oil price floor amid what OPEC+ describes as “uncertain” global economic outlook and the need for long-term guidance in the oil market.
Another important detail is that the 23-member group will only meet every six months, signaling that the new target production level of 40.1 will not be tinkered with on a month-to-month basis.
The JMMC, however, will meet every two months, meaning that there is maneuverability for tweaks to policy if market conditions waver.
We see OPEC+ going for a “sell more for less” strategy amid weaker-than-expected demand as recession weighs and as supply ticks up in the US.
The announced OPEC+ cuts, even if executed at a 60% level would push inventory draws into bullish territory.
We believe that the price impact of the announced measures will be significant. By December this year Brent would reach over $100 USD per barrel, up from our earlier call for $89 USD per barrel.
Reactions
- The U.S. has already reacted by stating its "disappointment" and plan to release an additional 10 million barrels of SPRs in November. With inventories at record lows and U.S. Gulf Coasts that run heavy and sour oil are already at high utilization, a release of more light and sweet volumes for exports would further widen the WTI-Brent spread.
- The U.S. government may also consider legislation aimed at what has previously been dubbed “NOPEC”, which would restrict how OPEC+ barrels are imported to the U.S..
- U.S. shale producers, in particular private operators, in reaction to the uplift in oil prices, may ramp up output, beyond the 500,000 bpd growth in crude and condensate we are forecasting between September and December 2022 to finish out the year at 12.7 million bpd. The question is if, and how fast, production can be accelerated.
- Higher oil prices will inevitably add to the inflation headache that global central banks are fighting, and higher oil prices will factor into the calculus of further increasing interest rates to cool down the economy.
- Demand destruction as a result of higher oil prices
- Unilateral cuts by Saudi Arabia if upside pressure on prices does not fully materialize.
Jorge Leon is a senior vice president with Rystad Energy.
