Countdown to key meetings! OPEC+ is considering cutting production by another 1 million b/d. Can the new production reduction measures be achieved?

Gelonghui Finance ·  11/30/2023 10:55

Source: Gelonghui

How does it affect oil prices?

Due to internal differences, the OPEC+ meeting has finally entered the countdown after a series of changes.

Later this Thursday, OPEC and its allies will meet to discuss 2024 production. Earlier, there were media reports that OPEC+ is considering implementing new production reduction measures, or cutting production by up to 1 million b/d.

Sources revealed that negotiations before the meeting focused on further cuts in oil supply to support the market, but the details have yet to be agreed upon.

Previously, oil prices had risen continuously by about 2% in the past two days to a new high in the past two weeks due to concerns surrounding the high-risk OPEC+ meeting and signs of the Fed ending interest rate hikes that surpassed the increase in US crude oil inventories.

On Wednesday, WTI crude oil futures for January closed up $1.45, or nearly 1.90%, at $77.86 per barrel. Brent crude oil futures for January closed up $1.42, or nearly 1.74%, to $83.10 per barrel.

Can the new production reduction measures be achieved?

On Wednesday (November 29), local time, media reports said that representatives of oil-producing countries said that although the crude oil market was tight due to the Middle East conflict, “OPEC+” formed by OPEC member countries and non-OPEC oil producers is considering cutting production by an additional 1 million b/d.

It is worth noting that this move may push up oil prices. This decision may be announced at the OPEC+ online meeting on Thursday.

The conference was originally scheduled to be held last week (November 26), but was postponed due to differences over production. OPEC+ sources say this is because of differences over production quotas for African producers, but the organization has basically solved this problem.

In the past, OPEC+ negotiations on production quotas were often difficult. The most recent meeting was in June, which extended the current oil production reduction period until 2024 and agreed to increase the UAE's production quota as the UAE strives to expand production capacity.

Saudi Arabia, Russia, and other OPEC+ members have promised to take a series of measures starting at the end of 2022 to cut total oil production by about 5 million b/d.

These include Saudi Arabia's additional voluntary production cut of 1 million b/d, which expires at the end of December, and Russian export production cuts of 300,000 b/d until the end of this year.

According to information, Saudi Arabia, Russia, and other OPEC+ member countries produce about 43 million barrels of oil every day, accounting for more than 40% of global supply. They have cut supply by about 5 million b/d, or about 5% of global demand.

Currently, it is uncertain whether a new production reduction agreement can be reached because OPEC is facing huge resistance within itself. Delegates at the meeting said that a general continuation of the current production restrictions is the most likely scenario, but the negotiations are not over yet.

In this round of negotiations, Saudi Arabia, the world's largest producer of crude oil, supports further production cuts. Since July, Saudi Arabia has voluntarily cut production by 1 million b/d and has asked other members of the coalition to reduce quotas to share the burden of production cuts.

However, Nigeria and Angola, the two largest producers of crude oil in Africa, have been resisting lowering their respective quotas. According to a report commissioned by OPEC, quotas in Nigeria and Angola have overstated their production capacity. Delegates said that the UAE is also unwilling to cut production.

How does it affect oil prices?

Although internal differences have been ongoing, how will OPEC's new production reduction agreement affect oil prices?

Tamas Varga (Tamas Varga), a senior market analyst at crude oil broker PVMoil Associates, said that the requirements of the two major African oil producers reflect the impact of the recent global slowdown and falling oil prices on their economy and finances.

All African countries, whether oil producers or not, are under tremendous pressure in terms of currency reserves. Nigeria and Angola are heavily dependent on their oil and gas sector. As inflation increases and debt repayment funds increase, oil dollar revenue becomes particularly important, and the shortage of dollars has caused the two countries' currencies to continue to depreciate.

RBC Capital Markets LLC expects OPEC+ may reach an agreement with stubborn Angola and Nigeria to allow a wider range of organizations to begin discussions on production issues. If the problem can be solved, then the group has “a lot of leeway” to collectively make deeper cuts.

Dutch International Group analysts said that if current production reduction measures continue, it is expected that most of the market surplus may disappear early next year.

“If OPEC+ wants to provide more solid support to the market and ensure that inventories do not increase early next year, they will need to agree on deeper and broader production cuts.”

“In recent years, Saudi Arabia and OPEC+ have developed a habit of surprising markets at meetings. However, with aggressive cuts already in place, people do wonder to what extent the group is likely to surprise the market by more than expected.”

The Eurasia Group released a report predicting that if OPEC+ does not reduce oil production by 1 million b/d, oil prices will fall to the $70 per barrel mark.

Bank of France and Pakistan believes that if OPEC+ cannot cut production further, the price of Brent crude oil may temporarily drop to around 65 to 70 US dollars/barrel. The demand response to prices below $70 will be important, as lower prices will boost demand while dampening momentum in non-OPEC producers.


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