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What to Expect From OPEC+

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Tomorrow’s meeting of the OPEC cartel is expected to be quite an event. And not just because it’s the first time since the start of the pandemic that delegates are meeting in person. There is rampant speculation that it might agree to cut oil production by at least 1 million barrels per day. That would completely reverse the “extra” increase that was agreed on just a few months ago in
the summer.

Brent has been trading below $90/bbl for the last three weeks, and has even slipped down to near $80/bbl for a bit. Geopolitical events have propped up the price a bit, such as the leaks in the two Nord Stream pipelines (which are still emitting natural gas). However, the general downward trend is seen as a result of demand destruction from an impending recession.

Prices aren’t stable

Even $90/bbl is relatively high, given trends before the pandemic. The price is back to where it was before the start of the war in Ukraine. But that’s not considering inflation. If we take into account the loss of purchasing power of the dollar, the price of crude is closer to $82/bbl, or pretty much the level at the start of the year, when OPEC production was at 30M bbl/d.

Although OPEC+ had agreed through the year to slowly ramp up production, the cartel had struggled to meet targets. In fact, actual production has dropped by about 0.5M bbl/d since May.
So the practical impact of a production cut might be limited, with the effect on the market being more psychological. In August, it was reported that OPEC+ members missed production targets
by ~3.6M bbl/d. A cut of even 1.5M bbl/d (which is the top of the speculated range) would simply bring production targets more in line with actual production figures.

Where things are going

OPEC members have cited lack of infrastructure spending as the cause of the slump in production. Production capacity keeps falling slowly as existing facilities are exhausted and new ones aren’t brought online. Despite the high prices recently, there has been little interest in more production investment. A pending recession that would push prices down even further would make the case for investment in oil production even less interesting.

In order to attract investors, oil prices have to be at a sufficient price for long enough. Which could be understood as one of the arguments for OPEC+ to cut production and try to keep prices above a certain level. Although none of the members officially have made such a statement, the constant comments about the lack of investment in the sector could be understood in that light.

Setting the stage for the future

That doesn’t mean we can affirm that $90/bbl is anything like a price floor. However, it is telling that it wasn’t long after Brent fell below this level that rumors of a production cut started circulating, and there were high level contacts between Russia and Saudi Arabia. Those two countries, the second and third largest producers, are also among the few countries with extra production capacity. As long as they are willing to cut production, then prices are likely to remain supported.

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