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Opec-Plus Backs Symbolic Output Cut

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Opec-plus on Monday said it would revert to August oil production levels in October, implying an official 100,000 barrel per day output cut in a move aimed at supporting "the market’s stability."

The alliance, in a statement, said last month's decision to raise output in September had been intended only for a single month.

Realistically, the decision will have little impact on the physical oil market given that only a few countries have been able to meet their production quotas.

Energy Intelligence understands that Opec-plus ministers hope the decision will send a strong signal to the market that the alliance is serious about implementing further cuts in the future, if required.

Delegates described Monday’s ministerial meeting as a smooth affair with all countries agreeing that the current high levels of market volatility were "psychologically" harmful to the oil market.

"The Opec and non-Opec ministerial meeting noted the adverse impact of volatility and the decline in liquidity on the current oil market and the need to support the market’s stability and its efficient functioning," according to the final communiqué issued by the Opec Secretariat.

Benchmark Brent crude prices were up 4.3% at more than $96 per barrel following the announcement.

Physical Supply

The symbolic cut of 100,000 b/d will have minimal impact on physical supply. Collectively the group has been unable to reach its target for many months, falling some 2.8 million b/d short in July.

According to Energy Intelligence estimates, the decision could remove about 44,000 b/d of oil from the market, given that most Opec-plus members were already pumping at levels well below their monthly quotas.

Monday's decision sent a strong message that the group is ready to defend its control of oil markets from what many delegates saw as excessive Western intervention, including the recent proposal to implement price caps on Russian crude.

Russia's Deputy Prime Minister Alexander Novak told the Rossiya 24 TV channel in response to the question about further possible cuts by the group, that Opec-plus doesn't target any price levels but rather seeks market balance to ensure that there is neither a deficit nor a surplus.

"The decision demonstrated that we have a flexible instrument that allows to take into consideration both the necessity to increase production, or to cut it," said Novak. He added that the group will continue to monitor market developments and pointed to numerous uncertainties, including about production by the non-Opec-plus countries and the planned price cap on Russian oil.

Psychological Barrier

The group’s decision Monday quashed assumptions stated by some US officials that Opec-plus could further increase supplies to market following their 100,000 b/d increase last month.

One delegate described it as "breaking a psychological market barrier."

In a statement after the meeting, the Biden administration touted its efforts to lower oil prices by increasing supplies through increased US production and releases from the Strategic Petroleum Reserve.

“President Biden is determined to continue to take every step necessary to shore up energy supplies and lower energy prices,” the White House said.

For 2022, data from Opec’s Joint Technical Committee showed a forecast surplus of 400,000 b/d, but since the market is still facing a problem of disconnect between fundamentals and price, Opec-plus’ future decisions cannot be easily predicted by supply/demand balances alone.

The secretariat’s communiqué echoed comments from Saudi Arabia’s Energy Minister Prince Abdulaziz bin Salman last month, where he warned of the adverse effects of a yo-yoing market.

"Opec-plus has the flexibility and the commitment among members within the Declaration of Cooperation to deal with market challenges and provide guidance, including cutting production at any time and in different forms as has been clearly demonstrated in 2020 and 2021," Prince Abdulaziz told Energy Intelligence in an interview in late August.

The next Opec-plus meeting is due to take place on Oct. 5.

However, Monday's statement said that — given the volatile market situation — it had been agreed that the group’s chairman, Prince Abdulaziz, could call for an emergency meeting if needed.

Topics:
Opec/Opec-Plus, Oil Supply, Crude Oil, Oil Prices
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