It was not a surprise that the OPEC+ meeting was postponed slightly just three days before its official start, which is unusual in this volatile economic context. Although the short period between the postponement announcement and the new date, which was postponed from November 26 to November 30, raised questions about the real reasons behind this decision, the markets returned to stability after the initial fluctuation.
The impact of this decision was not long-lasting on oil prices, as they fell sharply immediately after the postponement was announced, but then largely recovered. This rapid transformation raises questions about the nature of the events that may be going on behind the scenes that may have an impact on the oil market.
It is worth noting that oil prices depend heavily on expectations of global supply and demand, and any unexpected change in these dynamics could lead to sharp fluctuations in the markets. The current postponement may be an indication of possible changes in policies or negotiation between producing countries, which may affect the rebalancing of the oil market.
Expectations are also heading towards an important period in the oil market as the OPEC+ meeting approaches, postponed to November 30. Most analysts expect that the meeting will witness significant changes in the oil production strategy, either through a modest reduction in production or an extension of the period of current cuts.
In light of the current market volatility and uncertainty, OPEC+ production cuts enhance the chances of stabilizing oil prices and maintaining market balance. This option may be necessary in light of the effects of global events on the economy and demand for oil.
On the other hand, extending the discount period could be a positive signal that enhances market stability in the long term.
Oil price fluctuations and the impact of OPEC+ production cuts
In the context of the current transformations in the oil market, OPEC + reduced its oil production twice during the previous year over the last twelve months, reducing production by one million barrels per day in April, followed by another reduction of two million barrels per day in November 2022.
While the Kingdom of Saudi Arabia is considered the largest oil producer among OPEC+ members, the largest share of these reductions comes from its production. The Kingdom’s role is not limited to adhering to these mandatory reductions, but it also announced an additional voluntary reduction of half a million barrels per day in June. This step reflects the Kingdom’s commitment to supporting market stability and controlling production in a sustainable manner.
Russia has adopted a similar stance, announcing its participation in efforts to reduce production. This step reflects international cooperation and understanding between major oil producers in an attempt to control supply and demand, and thus maintain the stability of global oil markets in light of the current economic and environmental challenges.
The OPEC+ group constitutes about 40% of the total global oil supply, while the remaining half consists of other countries such as Canada (6%), China (5%), and Brazil (3%). According to US Energy Information Administration reports, the United States stands out as the world’s largest oil producer, contributing 21% of total global production. The Kingdom of Saudi Arabia ranks second in this context with a rate of 13%.
Analysts at Morgan Stanley noted that oil production by non-OPEC producers and non-Russian countries has seen a steady rise since the beginning of the Covid-19 pandemic. This rise comes as part of their efforts to address OPEC+ production cuts.
OPEC+ faces production challenges and oil market recovery
Morgan Stanley highlights the importance of any decision taken by oil producers, especially regarding reducing production. This opinion comes in the context of a gradual improvement of supply chains in the oil industry after they were affected by the repercussions of the pandemic. This improvement is evident in the recovery in oil demand and the stability of markets, which indicates the importance of production keeping pace with these changes.
With non-OPEC production continuing to grow, with an expected increase of up to 1.4 million barrels per day over the next 12 months, this rise is estimated to be sufficient to meet the expected growth in global oil demand. These expectations come in the context of sustainable transformations in the energy market, as increased production contributes to meeting market needs.
Looking ahead, non-OPEC production growth is likely to be sufficient to meet global oil demand in the coming years, including 2025 and 2026. This additional growth is expected to play an important role in maintaining the balance of supply and demand, reducing pressure on OPEC+ and contributing to achieving stability in global oil markets.
Morgan Stanley’s analysis indicates that there is little room in the oil market to accommodate more OPEC+ production. This reflects the market’s need to achieve a balance between supply and demand to avoid a decline in oil prices in the short and medium term.
Based on this analysis, it becomes reasonable to expect additional measures to be taken to balance the market. In this context, cuts in oil production could be one of the possible options for OPEC+. The voluntary cuts, which were planned to end at the end of March 2024, may be extended to the end of 2024, with the aim of maintaining market stability and avoiding excess supplies.
OPEC+ safeguarding quota faces risk of inventory buildup
To ensure “balance” in the crude oil market and maintain the price of a barrel of Brent crude oil at the base level of the mid-$80s, a set of measures need to be taken. According to Morgan Stanley’s analysis, there are two main risks arising from this hypothetical scenario.
The first challenge is that with the implementation of OPEC+ cuts and the improvement of supply chains in several member countries, excess capacity of approximately 5 million barrels per day has accumulated. According to a Morgan Stanley analysis, this figure indicates that this surplus is now “close to the highest level in 25 years (excluding the period of the Covid-19 pandemic).”
It is logical that many OPEC+ countries are looking to increase oil production to supplement their coffers, similar to other member states, including Iran and Venezuela, which do not adhere to the quota system. Morgan Stanley notes that this could lead to “tension” among some members of the organization.
The second risk is OPEC+’s decision to defend its market share, which has declined continuously over the past 12 months. “History warns of the danger this ultimately poses,” Morgan Stanley says. If OPEC+ decides to fight to maintain or regain its market share, there is a high probability that crude oil prices will decline.
Morgan Stanley anticipates ongoing backing for Brent crude around $85, contingent on OPEC+ upholding production cuts. Stability relies on OPEC+ commitment; failure at the next meeting might elevate crude inventories, posing a risk of Brent crude plummeting to $70 per barrel.
Morgan Stanley also expects that Saudi Arabia will continue to gradually reduce production until the end of the second quarter of next year, with a gradual increase in production in the second half of the year.
