As traders brushed off the news of OPEC+’s deeper production cuts, crude oil prices dipped and are likely to post their sixth weekly decline in a row.
OPEC+ yesterday agreed to deepen the current production cuts of 1.3 million bpd by some 900,000 bpd, taking the total to over 2 million bpd. This, however, left traders cold as earlier reports mentioned discussions of additional cuts of up to 2 million bpd. The cuts will be in effect over the first quarter of 2024.
“Once the dust settles these initiatives may be enough to sustain the price of Brent in the 80s but with the U.S. economy heading for a semi-hard soft landing and China still struggling, the focus on weakening demand will be stronger than on this attempt by OPEC+,” said Saxo Bank’s head of commodity strategy, Ole Hansen, as quoted by Reuters.
UBS’ Giovanni Staunovo noted that the additional cuts may remain on paper only: “It seems the OPEC+ production cuts are ‘voluntary’ cuts, not part of an OPEC+ agreement. Hence the concern is that a large fraction of it could be a pledge on paper and effectively less barrels being removed from the market.”
Goldman Sachs called the additional cuts “a temporary response to inventory builds and production growth, noting also the increase in production capacity. The bank’s analysts also noted the fact that the additional cuts are voluntary, meaning that any further output reductions would be even more challenging to agree on, as reported by Bloomberg.
Oil prices initially jumped after the OPEC+ announcement. Later in the day, however, they started sliding, pressured by the considerations expressed by analysts. Also, as Goldman analysts pointed out in their note, the additional cuts were expected—the element of surprise that pushed prices significantly higher when Saudi Arabia first announced its voluntary cuts in the summer was absent this time.
