At the beginning of September, the price of Brent oil fell through the $75 level, which had served as a support until then, and not by chance: OPEC+, that is, the alliance of oil exporting countries, and the producers who have joined them for shorter or longer periods of time, set this level as the minimum expectation last year. They agreed on a serious, voluntary production reduction to achieve this.
OPEC+ is in a tight spot
After the implementation of the agreement at the end of last summer, it was possible to maintain the price for a year, but this did not continue at the beginning of September. The commitment was not planned for a long time: according to the plans, its gradual reduction would have started in September. But the price fell without it, partly because China’s imports fell sharply due to its economic difficulties and rapid transition to electric cars, and partly because of the rapidly increasing output of exporters outside the organization.
Brent oil price per barrel in dollars, 2 years
Image: stooq.com
Under these circumstances, they did not want to further reduce the price by increasing production, they were confident that it would strengthen a little, and then they could move in October. However, this did not happen: as you can see on the graph, the price retested the $75 level in a textbook manner, but did not go above it, but turned away from it, to around $70-71. The former support has thus become resistance. The organization thus decided on another postponement, until December.
Problems within the organization
In the meantime, OPEC+ is facing another serious challenge: not everyone complied with the voluntary commitments, so it happened that actual production was higher than planned. Two sources familiar with the organization’s affairs told CNBC that the association is now trying to resolve this issue, as major producers such as Iraq and Kazakhstan have far exceeded their quotas. It was mentioned that Russia also occasionally exceeded the quota when it had the opportunity to do so with the help of a shadow fleet maintained to circumvent Western sanctions.
A total of 8 countries have taken part in voluntary production curbs of a total of 2.2 million barrels per day, and this amount was scheduled to begin to be reduced in October. However, due to the weakness of the market, the move was postponed for the time being until the end of the year, which could have been logical to the extent that, due to the presidential election campaign, it is conceivable that the American government will participate in some way in reducing the price for the sake of re-election, for example by increased, possibly brought forward exports or postponed imports .
Plans for next year
According to the current agreements, OPEC+ would produce 39,725 million barrels of oil next year, which is a narrow 40 percent of the world’s total output. The 8 members that made the voluntary commitments would also reduce production by 1.7 million tons per day, which is half a million barrels per day compared to this year’s reduction: production should be increased by this amount from January at the latest.
The Saudis are on their heels
The Financial Times recently claimed that the most important member of OPEC+, essentially its leader, is willing to acknowledge that the oil price will be significantly lower than it had previously expected, and that it will increase its output after December, that is, it will not postpone the planned reduction of the part of the voluntary curtailment. . The country unofficially calculated a target price of 100 dollars, and even planned a budget with it, but according to current information, it was discarded.
Carole Nakhle, founder and CEO of analyst firm Crystol Energy, told CNBC that Saudi Arabia’s message was intended to send a strong signal to members who violated the voluntary commitment. However, if Saudi Arabia gets angry and significantly increases production, it alone can bring down the price considerably, and no one else in the alliance can increase production like the Kingdom of Saudi Arabia, which still has 2-3 billion free capacity.
Not without precedent
The possible Saudi move would not be unprecedented: in 2020, the Saudis and Russia began a week-long price competition, flooding the market with oil at a time when demand had already fallen due to the sudden outbreak of the pandemic. The Saudi-Russian truce contributed to temporarily negative prices in WTI oil futures.
They get together
OPEC+ also receives data on monthly production from seven independent sources, so that they do not rely only on the reports of the members, because the members who break the agreement like to hide the ugliness at this time. The association’s ministerial-level committee, which examines the production data and checks the members’ commitments, will next meet on October 2. It is not yet known whether they will decide on the production increase postponed until December.
Source: www.economx.hu
