Taling markets: OPEC+ is underproducing, limiting impact of possible supply cuts
- OPEC delegates have said the group will consider cutting its production targets by anywhere between 500,000 barrels a day and 1.5 million barrels a day
An OPEC+ production cut when the cartel meets later Wednesday is likely to be bigger on paper than in practice, dampening its impact on oil prices, as the group’s longstanding inability to meet its targets means it is already underproducing, oil analysts say.
The Organization of the Petroleum Exporting Countries and its Russia-led allies--known collectively as OPEC+--are set to meet in person in Vienna for the first time since before Covid-19. An in-person meeting is being taken as a sign that a significant change in the group’s policy is in the cards.
OPEC delegates have said the group will consider cutting its production targets by anywhere between 500,000 barrels a day and 1.5 million barrels a day. Some analysts say a cut could be as large as 2 million barrels. Even a reduction at the low end of that range would mark the group’s biggest production cut since 2020.
But OPEC+ is already significantly under-producing their current targets. As of August, the group is more than 3.5 million barrels a day behind its quotas, with Russia accounting for a large chunk of that after its oil industry was targeted by Western sanctions.
That shortfall means that whatever is agreed in principle Wednesday will in reality have a smaller impact on global oil supplies. The effective cut will be roughly 50% of whatever is agreed, estimates Goldman Sachs, meaning a 1 million barrel a day cut would in practice be closer to 500,000 barrels a day, the bank says, in a note.
“Any cut will over promise and under deliver due to the well understood issues with [OPEC+’s] producer quotas," said Joel Hancock, lead energy analyst at Natixis.
That could dampen any curtailment’s impact on prices, which have already risen in the days leading up to the meeting. Brent crude oil has risen more than 7% so far this week, back above $90 a barrel.
A production cut of 1 million barrels a day could have a positive impact on prices of as much as $19 a barrel, according to Goldman Sachs, while DNB Markets thinks the impact on prices would be negligible.
Many analysts were already factoring in an OPEC+ cut into their forecast and so have stuck to their expectations that oil prices should return to $100 a barrel before the end of the year. Brent crude is forecast to rise to just over $99 a barrel in the fourth quarter, according to the average of responses submitted by bank analysts in a Wall Street Journal survey last month.
Instead, analysts say a cut would be more about signaling OPEC’s resolve to keep prices at or above current levels and encouraging investors to return to the oil market after they have shunned falling oil for months.
“I question the impact it will have," said Hani Redha, a multi-asset portfolio manager at PineBridge Investments. “It might put a higher floor on the oil prices rather than trying to push prices higher."
The meeting comes amid a backdrop of tumbling oil prices, and persistent fears that slowing global growth would presage a period of weaker oil demand. Having spent months unwinding pandemic-era supply discipline, the benefits of a sharp cut now look appealing to most OPEC+ members.
As most are already undershooting their output targets, any reduction could mean higher prices but no change to their actual output, said Helge Andre Martinsen, senior oil analyst at DNB Markets.
Meanwhile, Saudi Arabia, one of the few producers to meet its quotas, is pumping oil at a rate of roughly 11 million barrels a day, close to its maximum capacity and a level that analysts say it is unlikely to be able to sustain. A cut would allow Saudi Arabia to rebuild some much-needed spare capacity.
Meanwhile, U.S. shale oil producers are unlikely to ramp up output to compensate and steal OPEC’s market share. Capacity constraints in the U.S. have kept oil rig counts flat despite higher oil prices, adds Mr. Martinsen.
The move could backfire, however, prompting countermeasures from the U.S., such as releasing more oil from its strategic reserve, said JPMorgan, in a note. The Biden administration has for months petitioned Saudi Arabia to pump more oil to help ease the burden of high oil prices on consuming nations.
This story has been published from a wire agency feed without modifications to the text
