What to Expect From OPEC+

Tomorrow’s meeting of the OPEC cartel is expected to be quite an event. And not only because it is the first time since the beginning of the pandemic that delegates meet in person. There is rampant speculation that it might agree to cut oil production by at least 1 million barrels a day. That would completely reverse the “extra” increase that was agreed upon just a few months ago
the summer

Brent has been trading below $90/bbl for the past three weeks, and even dipped to near $80/bbl for a while. Geopolitical events have slightly increased the price, such as the leaks in the two Nord Stream pipelines (which still emit natural gas). However, the overall downward trend is seen as a result of demand destruction from an impending recession.

Prices are not stable

Even $90/bbl is relatively high, given trends before the pandemic. The price is back to where it was before the start of the war in Ukraine. But that doesn’t take inflation into account. If we consider the loss of purchasing power of the dollar, the price of crude is closer to $82/bbl, or almost the level at the beginning of the year, when OPEC production was at 30M bbl/d.

Although OPEC+ agreed throughout the year to slowly increase production, the cartel has struggled to meet targets. In fact, actual production has declined by about 0.5M bbl/d since May.
So the practical effect of a production cut could be limited, with the effect on the market more psychological. In August, it was reported that OPEC+ members missed production targets
at ~3.6M bbl/d. A cut of even 1.5M bbl/d (which is the top of the speculated range) would simply bring production targets more in line with actual production figures.

Where things are going

OPEC members cited a lack of infrastructure spending as the cause of the drop in production. Production capacity continues to decline slowly as existing facilities are exhausted and new ones are not brought online. Despite the high prices recently, there has been little interest in more production investment. A pending recession, which would push prices even further down, would make the case for investment in oil production even less compelling.

To attract investors, oil prices must be at a sufficient price for a long enough time. Which could be understood as one of the arguments for OPEC+ to cut production and try to keep prices above a certain level. Although none of the members officially made such a statement, the constant comments about the lack of investment in the sector could be understood in that light.

Setting the stage for the future

That doesn’t mean we can claim that $90/bbl is anything like a price floor. However, it is telling that it was not long after Brent fell below this level that rumors of production cuts began to circulate, and there were high-level contacts between Russia and Saudi Arabia. These two countries, the second and third largest producers, are also among the few countries with extra production capacity. As long as they are willing to cut production, then prices are likely to remain supported.

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