(WCTW) What Will OPEC+ Do?
Last Friday saw oil prices surge following rumors that OPEC+ is considering deepening production cuts to offset weaker oil prices. This week will have a lot of volatility as traders front-run the prospects of deeper cuts or take profits ahead of the meeting. Either way, readers should expect a lot of back and forth.
But before we talk about what OPEC+ will do, it's important to revisit some of the things we've said and what the consensus is going into this meeting.
On Nov 8th, we published an article titled, "Is an OPEC+ coordinated cut coming?" In the article, we said:
OPEC+
As the article has already pointed out, there are conflicting views out there. OPEC+, in its monthly reports, believes that global oil demand is strong. And because of that view, OPEC+ has only resorted to the voluntary cuts from Saudi to hold balances together.
But as we argued, that simply can't be the case. The market, in our experience, has never given this many conflicting signals to a narrative. As a result, OPEC+ also needs to acknowledge that demand is likely weaker than what's being shown on paper.
In essence, Saudis will need to convince the rest of OPEC+ that this needs to be a coordinated effort.
For the Saudis, this argument will be an easy one to make. Global economic indicators continue to soften. The Fed continues to remain hawkish with rates, so tighter monetary conditions will continue. And if a recession is coming, then OPEC+ will need to cut in a coordinated matter to stave off inventory builds.
Perhaps our criticism of IEA was wrong. Maybe balances for 2024 are implying bigger builds, and if so, it will be in OPEC+'s hands to fight off not only the physical oil market balance but also the perception of the oil market.
We think outside of Russia and Saudi, the rest of the group would need to cut supplies by ~1 million b/d. For Russia, the cut needs to be material enough to reduce crude exports back to ~4.3 million b/d (-700k b/d from here). For the Saudis, they would simply extend the voluntary production cut of ~1 million b/d.
Effectively, this would bring OPEC+ crude exports down to ~26.5 million b/d or somewhere between 2021 and 2022.
This export level would also match the lows we saw in August that prompted heavy global oil inventory draws. If demand does weaken as the market expects, then not only will global oil inventories not build, they should continue to decline.
As for the consensus, we did a poll on Twitter that showed mixed results.
Half of the people thought it was "no", and the other half thought it was "yes".
Looking at sell-side estimates, no one is expecting a coordinated cut. Instead, the market expects Saudi and Russia to extend their voluntary production cut into 2024.