OPEC and allies to cut output

OPEC+ is likely to cut oil production targets for November when the alliance of oil exporters meets later this week. This will be the first in-person meeting since the pandemic began in 2020 and the move away from online meetings may presage a more substantial shift in policy. At their September meeting, OPEC+ noted it had the “flexibility and the means” to “deal with…challenges and provide guidance to the market.” We may start to see guidance from OPEC+ take its cues from global central banks and adopt a more “hawkish” tone on oil production.

Oil prices have fallen steadily since hitting a peak close of nearly USD 130/b in March to less than USD 90/b as of early October as markets grow anxious over demand conditions in both the near term and into 2023. The drop in prices comes even as supply conditions remain constrained: OPEC+ has been routinely failing to hit target levels as many members run up against capacity, Russia will endure more substantial sanctions on its oil exports from December onward while producers in the US have seemingly topped out their investment into new production.

The apparent gap between expectations of demand and material supply conditions prompted OPEC+ to announce a modest cut of just 100k b/d for its October production target, a negligible move that was probably meant to be more a signal to markets that OPEC+ wasn’t prepared to let a disorderly sell off in prices run perpetually. With oil prices have fallen considerably lower since that cut was announced—Brent futures fell to less than USD 84/b in late September—OPEC+ will need to move in a more substantial way to affect oil markets in the coming months and quarters.

Our estimate for Q4 oil market balances is for a modest surplus of 500k b/d so that may be the minimum OPEC+ targets for a cut in order to return markets to balance. A 0.5m b/d cut spread across the OPEC+ countries would mean the UAE cutting output by about 40k/d and Saudi Arabia cutting by 130k b/d for November. A larger cut, such as the 1m b/d cut that seems to be in discussion in markets, means correspondingly larger individual country-levels cuts and would take the UAE’s production back to where it was in Q2. Any targets for lower aggregate output are likely to be larger in reality, however, given that many producers within OPEC+ have been failing to hit their target levels: Nigeria is the principal underperformer in the core OPEC countries, missing its August target by 850k b/d, while Azerbaijan, Kazakhstan and Russia have all struggled to hit higher target levels.

Saudi Arabia may also choose to voluntarily make an additional cut, above the aggregate OPEC+ decision. From February-April 2021, Saudi Arabia withheld 1m b/d from markets even as other members in OPEC+ kept output steady or were allowed moderate production increases. Cutting output unilaterally would also mean that Saudi Arabia can set aside more spare capacity should the global economy avoid a sharp recession in the coming quarters, allowing it to move as a swing producer and capture any marginal demand increases. While a negative for near-term headline GDP growth, the downward move in production would likely be offset by higher revenues for Saudi Arabia.

Our oil price assumptions for the end of 2022 and into 2023 assumed that OPEC+ would adopt a more interventionist stance in the market and thus we are holding our view that oil prices will record an average of USD 105/b for Brent and USD 95/b for WTI in 2023. The challenge in cutting output will be to avoid pushing prices up too much that it exacerbates the pending slowdown in demand growth by making fuel unaffordable for many economies already dealing with high inflation and tighter monetary policy. Thus while we may get a cut now, it doesn’t necessarily mean OPEC+ will keep moving in a downward direction on production going forward.