Opec-Plus Weighs Big Cut to 'Get Ahead of Curve'

Opec-plus ministers will meet in Vienna on Wednesday to discuss a possible cut in the alliance's oil production that could be as big as 1 million to 1.5 million barrels per day, delegates told Energy Intelligence.

The gathering in Vienna will be the first time ministers meet in person since the start of the coronavirus pandemic in early 2020. A meeting of Opec-plus technical officials that had been scheduled for Tuesday was canceled.

Delegates said a cut is "imminent," with one person saying there are concerns about the strength of global oil demand and the producer alliance wants to "get ahead of the curve."

A final decision on whether to go ahead with a cut and the magnitude of such a move will be made at the Oct. 5 meeting.

Energy Intelligence understands that there is broad backing for a cut among Opec-plus members.

Depending on how it would be implemented, it could free up more spare production capacity that might be needed in the months ahead, which would put the alliance in a stronger position to manage oil supply.

A reduction in November would follow the announcement a month ago of a modest 100,000 b/d cut in October output.

That was widely seen at the time as a signal that Opec-plus stands ready to take action in response to volatility and uncertainty in the market.

"With oil prices having fallen considerably lower since that [October] cut was announced ... Opec-plus will need to move in a more substantial way to affect oil markets in the coming months and quarters," said Edward Bell, senior director for market economics at Emirates NBD.

Oil Dips Below $90

Brent crude futures spent most of the five months from March through July above $100 per barrel, but they fell to the low-to-mid $80s in late September.

Media reports have cited unnamed sources as saying that the anticipated reduction in Opec-plus output is a response to the recent drop in crude prices below $90/bbl.

Officials from member countries have maintained — as they typically do — that the alliance does not target a particular price range but seeks to maintain a balanced market by adjusting oil supply to bring it into line with demand.

Mideast Gulf producers — who usually take a long-term view of the market — are particularly keen to maintain cooperation within the Opec-plus alliance, pointing to the success of its supply management efforts during the pandemic.

Russia — the biggest non-Opec producer in the group — has also continued to sing the praises of Opec-plus during its war in Ukraine.

Freeing up more spare capacity by cutting output would give the alliance greater flexibility to respond to any sudden shifts in market conditions going forward.

"The market remains troubled by forces pulling prices in opposite directions. While the strong dollar, surging [bond] yields and continued lockdowns in major Chinese cities have raised demand worries, the risk to supply continues to be a supporting theme," said Ole Hansen, head of commodities strategy at Saxo Bank.

"In addition, the combination of Russian sanctions, an upcoming EU embargo and price cap discussion, the US eventually pausing its sales from strategic reserves and fresh US sanctions to curb Iran's ability to export crude oil may all continue to dampen the downside risks," Hansen added.

A Broader Policy Road Map?

Some observers say the calling of an in-person meeting has raised the prospect that Opec-plus may set out a broader policy road map to provide guidance to the market.

Such a road map would provide some clarity following the expiry at the end of August of the alliance's 2020 agreement to slash output by almost 10 million b/d and then gradually reverse those cuts over a period of more than two years.

"This will be a deeper discussion, not just about cuts, but about having a new long-term agreement," said Youssef al-Shamri, head of CMarkits.

A substantial cut in targeted output could help address the recent shortfall in Opec-plus production, with actual output lagging the group's collective target by some 3 million b/d in August.

Numerous members of the alliance have struggled to hit their individual production targets and a cut in the collective target — with pro-rata cuts for each member — could help to address this persistent underproduction.

"Opec-plus can cut quotas substantially without having a big impact on market supply," said Robin Mills, CEO of consultancy Qamar Energy.

It's unclear at this stage whether major Mideast Gulf producers such as Saudi Arabia and the United Arab Emirates would also announce unilateral cuts over and above their contribution to a reduction in the group's collective output.

And it's equally uncertain whether individual countries' production quotas would be revised.

"Saudi Arabia may also choose to voluntarily make an additional cut, above the aggregate Opec-plus decision," Bell said.

"Cutting output unilaterally would also mean that Saudi Arabia can set aside more spare capacity ... allowing it to move as a swing producer and capture any marginal demand increases," he added.

Supply Management and Politics

With the conflict between Russia and Ukraine still raging, a substantial cut in Opec-plus production might be interpreted as the alliance siding with Moscow ahead of upcoming price caps on sales of Russian oil coordinated by the G7 and the EU.

Opec officials often emphasize that politics is never a factor in its decision-making, and delegates have told Energy Intelligence that the current discussions about reining in production reflect real concern about the health of the global economy.

If a substantial cut does end up helping the group to set aside more spare capacity, that would give the alliance greater flexibility to increase production if and when a supply outage occurred or demand picked up.

Because of the EU embargo and price caps, Energy Intelligence forecasts that Russian output of crude and condensate will decline by 1.25 million b/d next year.