– Markets are seeing downward pressure on oil prices every time the external environment calms down, incentivizing OPEC+ to “do something”.
– However, the usual “something” has become more difficult: Saudi Arabia – even jointly with Russia – will find it hard to continue unilateral cuts, shouldering everyone else’s burden. But the usual approach for the Gulf Cooperation Council (GCC) OPEC members to team up to share the burden runs into a new and substantial internal problem: The UAE has increased its production capacity (officially now 4.4 million barrels per day (Mb/d)) by so much that a serious mismatch has evolved; its quota (a little below 3 Mb/d) is in need of being increased (as has already been agreed), not lowered.
– The supply-demand balance tells us that downward pressure on prices is likely to persist. On the supply side, new suppliers from outside OPEC+ are ratcheting up, first among them Brazil and Guyana. And the declining rig count in the US which seems to have so many analysts mesmerized, in reality is more than matched by substantial productivity increases in output per rig. Shale output continues to rise, and more can be brought online at short notice. On the demand side, even a soft landing in the US, a stabilization of growth in China and a shallow recession in Europe will not generate the consumption growth anticipated by OPEC’s research team.
– Geopolitical risk premia for oil are notoriously hard to quantify. If there is one, it has just moved lower. There appears to be no desire, at least on part of governmental players, to escalate the conflicts in the Middle East any further. The Russian-Ukraine war stagnates. This may all change, but for now, there is no desire to weaponize oil.
– And yet. For different reasons, the two leading OPEC+ producers want higher prices. But without intervention, and in a reasonably calm geopolitical environment, prices will resume their march toward the $70s and, who knows, perhaps lower, driven by economic forces.
– And so, yes, OPEC+ has “to do something”. Chances are they will. Perhaps not at this meeting, because it is a little tricky internally, but eventually.
– Where does it leave us? It means, the race between (a few in) OPEC+ imposing lower production, and suppliers from outside the group increasing theirs, supported by higher prices generated by these very cuts, appears set to continue. This is not a sustainable state of affairs, however.
“Oil market: Shifting Expectations“, Dr Carole Nakhle, Jul 2023
“Oil prices recede despite Middle Eastern geopolitical tensions“, Dr Carole Nakhle, Oct 2023
“Could OPEC+ Issue an Oil Embargo on Israel?“, Dr Carole Nakhle, Oct 2023