OPEC Is Losing Its Mojo on Wall Street

An oil field north of Basra, Iraq.
An oil field north of Basra, Iraq.

Summary

Recent production cuts by the cartel and its allies haven’t led to sustained higher oil prices.

Throttling back on oil production hasn’t helped OPEC and its allies to push up crude prices lately.

At least four times in the past 15 months, members of the alliance known as OPEC+ have slashed oil output, only for prices to soon retreat anyway. A surge near $100 a barrel petered out earlier this year, and crude futures tumbled 10% in the two weeks after the coalition announced a roughly 5% reduction on Nov. 30.

Even after shipping disruptions in the Red Sea spurred a recent rebound, Brent crude, the global pricing gauge, traded Friday at around $79 a barrel. That is down from about $85 a barrel when OPEC+ started this round of cuts in October 2022—despite those now amounting to nearly 13% of the group’s 2022 production.

The Saudi-led Organization of the Petroleum Exporting Countries and its Russia-led allies joined forces seven years ago this month, consolidating control over more than half the world’s oil supplies after soaring U.S. shale production sparked a collapse in prices. Now, output is surging again from the U.S. and other countries. Cartel members are widely suspected of dodging their quotas. And investors are questioning the coalition’s cohesion, especially after Angola announced this week it was leaving.

“I just don’t know how that group is able to generate sustained upward price pressure anymore," said Alex Turnbull, portfolio manager of Singapore-based Sagax Capital.

Pushing OPEC+ to this point: a flood of fresh petroleum gushing from the West Texas desert and undersea wells off South America’s coast. Global oil demand has grown by a robust 1.9 million barrels a day this year, according to S&P Global Commodity Insights. New supply from non-OPEC+ countries has swelled by 2.5 million barrels a day, mostly due to record production in the U.S., Brazil and Guyana.

That is driving the effort to boost prices. Saudi Arabia needs a fiscal break-even oil price of as much as $88 a barrel, according to Goldman Sachs, to fund a continuing makeover of the kingdom’s petroleum-dependent economy.

The cuts have left OPEC+ with at least six million barrels a day of idle production capacity, said Harry Altham, an oil analyst at StoneX Group. The depth of the reductions, their failure to raise prices and the temptation to tap in to that spare capacity for profit will make it harder than usual for the alliance to keep output under its target, said Vikas Dwivedi, global oil and gas strategist at Macquarie Group.

“They’re just not going to do it," Dwivedi said. “Most of the members will be very anti-cutting their production right now."

The group’s cohesion is one major issue for investors. The November meeting was delayed by four days due to a lack of consensus about additional cuts. The outcome was a patchwork of voluntary curtailments rather than an official updating of the coalition’s quotas. Less than a third of the reductions were genuinely new constraints on output and the lion’s share of those came from Iraq and the United Arab Emirates, countries whose commitment to cutting further is in doubt.

After OPEC cut Angola’s quota, the West African country first rejected the decision and then announced Thursday it was leaving the organization altogether.

Erratic quota compliance has long been a problem for OPEC, but Saudi Arabia has frequently pumped more or less crude to compensate.

Oil prices in 2012 would have been $39 a barrel higher had OPEC not opened its taps after output interruptions in Iran, Libya and other countries, according to one study. Prices between May 2020 and August 2021 would have been $36 lower had OPEC+ not slashed output by 10 million barrels a day after Covid crushed global demand, concluded another.

But now, the Saudis are already pumping the least amount of crude they have in more than a decade, leaving aside their pandemic low point. Their Russian partners are relying on oil to fund their war in Ukraine. So, the burden for further reductions may fall on the cartel’s smaller producers.

Still, Jorge León, an energy economist at Rystad Energy who once worked for OPEC, believes the group will stick together. León cites improved compliance since 2016, OPEC+’s massive output swings over the past few years and the increasing reluctance of U.S. oil companies to shift their own production in response to prices.

“They are in a much better situation than back in 2016," León said, “because essentially there’s no one competing with them in that swing producer role."

If and when OPEC+ regains leverage may hinge on global oil demand, since the outpouring of non-OPEC+ petroleum continues to grow. Goldman Sachs this week pruned its 2024 Brent crude forecast by $10 a barrel to a range of $70-$90, after raising its projection of U.S. oil output growth due to efficiency gains from faster drilling speeds and more-forceful fracking.

Global oil demand growth in 2024 is widely expected to fall far short of this year’s rate, which was inflated by China’s postpandemic reopening. S&P Global Commodity Insights is forecasting that expansion of non-OPEC+ oil supplies will once again exceed it. And near-term oil futures are trading at a discount to those for delivery further out the calendar, a classic sign of an oversupplied market.

Such conditions don’t bode well for OPEC+, said Adi Imsirovic, a veteran oil trader who is now a senior associate with the Center for Strategic & International Studies, because supply cuts in a well-stocked market tend to have a muted impact on prices.

“OPEC is strong in a strong market and weak in a weak market," said Imsirovic. “Until demand improves substantially, OPEC is in big trouble."

Write to Bob Henderson at bob.henderson@wsj.com

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