OPEC+ Production Cut - A Symbolic Gesture But A Powerful One
When the facts change, I change my mind. John Maynard Keynes coined the phrase and as it pertains to the oil market, the facts have changed.
Last week, we wrote a report titled, "The oil market is stuck between a rock and a hard place." In the article, we pointed out that OPEC+ could agree to inaction for the time being. But with the OPEC+ meeting now concluded and a symbolic cut of 100k b/d announced, the facts have changed, and the symbolic gesture is an important one.
For the oil bulls, the announcement is perceived as OPEC+ willing to defend the oil price from unnecessary volatility. For the oil bears, the cut is a desperate attempt at posturing in the face of weakening demand. But both sides can agree on one thing, the cut doesn't change a thing for OPEC+ production, because it was underproducing its quota by so much, that even if they decreased the quota by ~1 million b/d, none of it would have mattered.
As you can see from the latest August crude export data, OPEC+ crude exports YTD have remained largely unchanged. And from the data, it is abundantly clear that there are only 2 countries in OPEC+ (Saudi and UAE) with spare capacity:
Now that we have made the obvious argument that spare capacity is concentrated in Saudi and UAE, the symbolic gesture is an important one.
Because for oil watchers and energy investors, the key to figuring out whether or not we could sustain $100+ had in part to do with what the Saudis and UAE wanted.
This is why we believe the symbolic gesture is so important and it flipped the odds in favor of the bulls. For starters, this symbolic gesture all but guarantees that Biden's trip to the Middle East in June was a failed one. Unlike the Trump pressure in 2018, Biden failed to force the Saudis to unilaterally act. Like 2018, Saudis have the ability to increase production within the means of the current OPEC+ quota. Unlike 2018, Saudis are not only not doing anything about it, but they are willing to cut if the macro changes.