OPEC+ may have to cut its collective oil production targets much further this winter as a recession threatens Europe as it grapples with a severe energy crisis and China shows signs of falling demand of oil.
The symbolic reduction of 100,000 barrels per day (bpd) announced this week is largely irrelevant to the equilibrium of the oil market. But it sent a strong message to the market that the OPEC+ alliance is back in price watch mode and appears determined not to let oil fall too far below $90 a barrel, analysts said.
Recession fears
After an initial rally on the surprise – albeit negligible – reduction in their production targets, the oil market saw the OPEC+ decision as an admission of expectations of lower demand. This, coupled with new “zero-COVID” policy lockdowns in China, weighed on oil prices on Tuesday and Wednesday. Crude Brent prices have fallen this week below $90 a barrel – the lowest level since January, before the Russian invasion of Ukraine. Add to that the imminent recession expected in major European economies – triggered by the energy crisis and skyrocketing prices – and aggressive interest rate hikes by central banks, including the Fed, and the economic outlook for the world don’t look good. now.
Eurozone recession now looks likely due to worsening gas crisis, Fitch Ratings said in a report last week, even before Russia said the Nord Stream gas pipeline to Germany would remain closed indefinitely.
While it currently looks like OPEC+ is trying to defend the $90/bbl mark, it may have to cut production much deeper and could end up defending $50/bbl oil at the start of the year. next, Clyde Russell, columnist on commodities and energy in Asia at Reutersargue.
Supply uncertainties
The global economic slowdown and a looming recession in Europe will weigh on oil demand and prices. But there are also great uncertainties in supply. Therefore, even in the event of an energy crisis-induced recession, the oil market could still be tight enough to sustain high oil prices. It’s because no one knows how the expected Russian oil price cap will have an impact on the markets, especially if Russia follows through on its threat to stop exporting its oil to importers who have signed up to this capping mechanism.
Vladimir Putin upped the ante on Wednesday by saying that Russia would stop supplying all the energy products to Europe if the EU and its Western allies impose price caps on Russian oil and natural gas.
“We won’t supply gas, oil, coal, fuel oil – we won’t supply anything,” Putin said.
Planned price caps on Russian oil and gas exports are yet another ‘foolishness’, the Russian president said, adding that Europe has made ‘stupid decisions’ and is now trying to find a way out. away from it.
Another major supply uncertainty, this time a bearish factor for oil prices, is the possibility of a relaunch of the Iran nuclear deal, although the latest developments indicate a to move back” in the indirect talks between the United States and Iran, under the aegis of the EU, on a final draft of a possible agreement.
On the other hand, the ever-unpredictable Libya could halt its exports again at any time amid still unresolved differences over who controls and who should get the country’s main export revenue – that of crude oil.
OPEC+ in price watch mode
Given these uncertainties, it is not surprising that OPEC+ and Saudi Arabia in particular have indicated that they will closely monitor developments in the oil market. The alliance has never publicly admitted that it prefers a certain price of oil, but for now it seems determined not to let prices fall too much.
OPEC+ decided on Monday it could call a meeting at any time to discuss further actions. The group agreed to “request the president to consider convening an OPEC and non-OPEC ministerial meeting at any time to address market developments, if necessary,” OPEC said.
By giving the chairman of the alliance, Saudi Energy Minister Prince Abdulaziz bin Salman, the power to call a meeting at any time if necessary, OPEC+ sent a strong message to the oil market: the cuts could intervene in the short term, “in whatever form”. This could mean that one-sided cuts may not be ruled out either.
Although October’s token cut does not change fundamental supply-demand balances, OPEC+’s willingness to intervene whenever it deems necessary suggests that Saudi Arabia and other members influential OPEC+ believe that oil prices have already seen enough selling in recent months. . And they will fight to keep them “stable”. In other words, in the $90 to $100 range.
As Brent prices fell below $90 on Wednesday with recession fears front and center, expect “verbal intervention from OPEC+ next,” Ole Hansen, head of commodity strategy at Saxo Bank, said.
According to the oil broker PVM Oil Associatesthe expected increase in oil production outside the OPEC+ alliance by the end of this year “pale compared to the potential supply shortfall on the horizon.”
“And with the Iran nuclear deal still proving elusive and OPEC+ refraining from opening the taps, the long upward trajectory of global oil supply may soon come to an end,” said PVM Oil. Associates in a note Wednesday.
“As a result, the current tightening could intensify in the last three months of the year. This should be taken as a harbinger for those betting on further price declines at the end of the year.”
By Tsvetana Paraskova for Oilprice.com
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