OPEC will meet to discuss production cuts tomorrow, with the focus on the preceding JMMT meeting which will provide recommendations on what to do. The meeting got extra attention after it was delayed from last weekend amidst rumors that some countries wanted to increase production. Now the media is reporting that further cuts are likely to come from the gathering. What’s actually going to happen?
Lower Prices Bring Discord
It’s not the first time that countries push for increased production. Back in the summer, when crude prices were around the $70/bbl level, it was the UAE that wanted to produce more. There is the natural debate between members over how best to fill their coffers from the proceeds of oil sales.
On the one hand, increasing production means more revenue. But if there isn’t sufficient demand, then the increased supply can reduce prices and hurt profits. Many OPEC members are under increased pressure to pay down debts accrued during the pandemic, and so there is more reason to push for either increased production for themselves, or lower production overall. Typically, lower cost countries benefit from increased production, while higher cost countries want higher prices.
Things Come to a Head
Crude prices rose to as high as $98/bbl by the end of September as there was increased optimism about the global economy, particularly that the US would avoid a recession. Prices were subsequently kept high by fears that the Israel-Hamas conflict might spread. But lately the cost of crude has come down, and with it have come voices demanding changes in the quota allocation.
Most recently it was reported that Algeria and Nigeria wanted to increase their quotas. The latter is significant, because Nigeria has become the second largest producer in the cartel. Crude prices fell on the reports, as some interpreted that it might mean an increase in OPEC production. But, that’s not necessarily the case. If one or two countries have increased production, others might cut their own more to compensate. And the largest producer, Saudi Arabia, has seemed to be very eager to cut production to push up the price, going so far as to curtail its own production voluntarily.
So, More Production Cuts?
In the lead-up to the meeting, press reports have grown that overall production from OPEC+ will be cut even further. The exact mechanism is likely what will be decided at the meeting, and the media has reported that initial disagreements between the countries have been resolved. That might mean Saudi Arabia reduces its production even more.
One of the things that led some analysts to speculate that no further cuts will be agreed on is that the upcoming meeting will be virtual. Typically changes in policy don’t happen unless there is an in-person meeting. But, that’s no guarantee of no change. It just means the market is likely to be less sure about what to expect, and that could mean there is a larger reaction following the announcement from the JMMC tomorrow.
