OPEC and Russia seek to change the direction of the oil market with a fake production cut

Oil accumulates four consecutive months of falling. Since recessionary winds began blowing in advanced economies, expectations for demand for crude oil have fallen and the oil market has moved from quoting a ‘scarcity’ (sharp price increases) scenario to another ‘abundance’ (monthly) scenario that falls to two numbers). The Organization of the Petroleum Exporting Countries (OPEC) and Russia are not ready to smooth things out, so they will announce on Wednesday. Pieces that impress the marketsalthough at the moment of truth it is not fully implemented.

OPEC and Russia have already made it clear that they will not be part of the solution to the global inflation problem. However, strong and rapid increases in interest rates have lowered expectations for economic growth, and thus lower demand for oil and its derivatives. This has caused oil pans more than 25% In the past four months. The price of a barrel of Brent crude fell from $120 in June to $85 on some days this month.

To turn this around, OPEC has already pulled back to cut oil production by 1 million barrels per day, which appears to be more than enough to end the surplus crude oil that currently dominates the market and is putting pressure on prices.

“Such a move, if implemented, would undoubtedly signal the cartel’s determination and willingness to support oil prices… Prices could rise in response to this signaling strategy, as they have already done, but the real supply would fall less than announced,” he reassured the economists at Unicredit. OPEC, while reversing (in theory) all of the production cuts implemented during the Covid pandemic, is producing far less oil than it was at the start of 2020.

In August (latest number available), OPEC+ was collectively pumping around 30 million barrels per day (mb/d), which is about 3.5 million barrels/day less than the official quota (which means global supply is about 4% less than it should be). to be. ).

ghostly interruption

OPEC seeks to scare the markets by demonstrating its clear commitment to higher prices, but looking at the data, this cut will be partial at best, because the organization is already making real cuts due to the inability to produce more oil.

“The gap between actual and expected outputs has widened In recent months while the cartel has normalized its production. Most countries, with the exception of Saudi Arabia and the United Arab Emirates, lack spare capacity (the ability to produce more oil) as a result of years of underinvestment. (especially Nigerian and Angola),” they say from Unicredit.

In addition to the above, Western sanctions are weighing on Russian oil, which is only partially diverted from Europe to Asia. If the group cuts target production by 1 million barrels per day, it is likely that actual production will drop by about 550,000 barrels per day, as countries like Russia or Nigeria which produces less than quota They will see their official target decline, but they will remain above what they can currently produce.

Will OPEC be able to change the course of oil?

Economists at UniCredit believe that although the real production cut will be understated, oil may return to increases: “Although the impact on production will be limited, the new OPEC + restrictions could help refocus market attention towards the issue of tight supply, moving away from concerns about weak demand, and setting a floor price at $90 a barrel for Brent.” The balance between supply and demand is so tight that any change in production or expectations can cause significant reversals in the price of oil. However, Kuwait (a member of OPEC) confirmed that global energy security will be preserved, and some reassuring words that, however, do not specify anything.

Supply constraints are a permanent feature of today’s oil market and could be further exacerbated by the war in Ukraine, the depletion of strategic oil reserves and a lack of investment in the United States. Which could push Brent to exceed $100 a barrelThis quarter,” they said from Unicredit. However, looking at the other side of the currency, this devaluation may also be insufficient if the recession leads to the collapse of the economies of Europe and the United States, while hurting China’s growth.

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