Opec+ production cuts leave oil market sceptical

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Opec+ members have agreed to make additional voluntary cuts to oil production in 2024 in an increasingly fraught attempt to bolster the market, but crude prices fell due to signs of ongoing strains in the group.

Saudi Arabia pledged to extend an existing voluntary cut of 1mn barrels a day until the end of the first quarter while Russia said it would deepen its existing voluntary export reduction to 500,000 b/d from 300,000 b/d, as the group looks to offset a stuttering global economy and rising supplies from rival producers.

But in an unusual step Opec officials said additional voluntary cuts, designed to take the total reduction above 2mn b/d or about 2 per cent of world supply, would be announced by individual members in due course rather than the secretariat.

The uncertainty fed into growing market anxiety that strains are emerging in the Opec+ coalition more than a year after it started cutting production, with only a limited effect so far on prices.

The Opec+ meeting had first been delayed from Sunday as members wrangled over production targets and was moved online rather than have ministers meet face to face in Vienna at Opec’s headquarters.

Brent crude, the international oil benchmark, initially rallied on news of the cuts but then reversed to trade down on the day, with the contract for delivery in February losing more than 2 per cent to trade near $80 a barrel, well below the $98 a barrel year-high hit in September.

US benchmark West Texas Intermediate fell 2.5 per cent to $76 a barrel.

Traders said that the market was losing confidence in the ability of Opec+ to keep bolstering a price buffeted by expectations of relatively tepid demand growth next year and rising alternative supplies.

But analysts said that if all the cuts were made, supplies would tighten significantly in the first quarter of next year.

“The market is going to test Opec+ and whether $80 a barrel is really a floor they can defend,” said Raad Alkadiri of Eurasia Group. “The cuts being billed as ‘voluntary’ undermines the psychological impact for the market a little, but if the full cut is realised, its impact on the market should not be discounted.”

Prince Abdulaziz bin Salman, Saudi Arabia’s energy minister, who normally enjoys his prominent role at big Opec meetings, shunned the opportunity to hold a press conference to explain the group’s strategy.

The extension of the kingdom’s voluntary 1mn b/d cut was announced by Saudi Arabia’s state press agency.

But it was followed by a number of other pledges from members, including the UAE’s state news agency saying it would voluntarily cut by 163,000 b/d in the first quarter, while Iraq and Kuwait said they would cut by 211,000 b/d and 135,000 b/d respectively. Oman, Algeria and Kazakhstan also pledged additional reductions.

Amrita Sen at Energy Aspects said that while Opec+ had “failed to inspire confidence in the market”, if it followed through on the pledged supply curbs, the market would start to tighten.

The oil cartel is trying to bolster prices that have slipped in recent months while tensions in the Middle East are being heightened by the Israel-Hamas war.

Saudi Arabia needs an oil price of closer to $100 a barrel to fund the ambitious economic reform programme of Crown Prince Mohammed bin Salman, but has at times faced pushback from the White House, worried about the effects on inflation.

A White House official said on Thursday after the Opec announcement that President Joe Biden was “focused on [fuel] prices for American consumers, which have been coming down steadily”.

People close to the powerful Gulf members have ruled out the possibility of an embargo similar to the measures taken by the cartel during the 1973 Yom Kippur war. But the Financial Times reported this month that Opec countries might be looking to send a signal over the US’s backing for Israel amid the high level of destruction in Gaza.

The delay to the meeting from Sunday was partly motivated by talks with African members, including Angola and Nigeria, which have pushed back against attempts to curb their output as they attempt to revive their oil sectors after years of under-investment and mismanagement.

Opec said Angola, Nigeria and Congo had all had their production baselines — the level from which production quotas are calculated — lowered. No sub Saharan African members offered additional voluntary cuts.

Additional reporting by Tom Wilson in London and James Politi in Washington