Oil Markets Unimpressed By OPEC+ Cuts

Markets

Oil markets balked at the OPEC+ news this week that saw the organization extend cuts from Saudi Arabia and Russia and deepen the group's overall cuts with other member states beginning in the first quarter of next year. The distinction-and likely a large factor in sending prices downward on Thursday-is the fact that the additional cuts (those beyond Russia and Saudi Arabia's rollover cuts) are voluntary cuts.

On one hand, this could be seen as a large win for Saudi Arabia, which has been shouldering much of the market balancing efforts this year after agreeing to voluntarily cut 1 million bpd over this summer. OPEC's most prolific producer has for a while been laying the groundwork in expressing its displeasure with OPEC's other members, who have been benefiting from Saudi Arabia's cuts without having to carry as much of the burden from reduced production. In the end, Algeria, Kazakhstan, Oman, Iraq, Kuwait, and the UAE all agreed to voluntarily cut production during the first quarter of next year to the tune of 693,000 bpd.

On the other hand, the voluntary nature of the production cuts and the fact that OPEC+ did not announce the levels of the cuts because they were voluntary-leaving it up to each member state to do so-send oil prices falling after they had risen early in the day on rumors that the group could cut 2 million bpd at the start of the year.

Including Saudi Arabia and Russia, the voluntary cuts total 2.193 million bpd, although 1.5 million bpd of that are rollover cuts that Saudi Arabia and Russia are currently carrying out.

With Saudi Arabia threatening short sellers and those that bet against oil that they would be "ouching like hell", the fall in prices came as a painful reminder to Saudi Arabia-often seen as the one largely in control of the market-that it may not have the power to deliver on such threats as it used to.

In addition to the cuts, there were two other noteworthy developments with the OPEC+ talks. One, the inclusion of Brazil into the OPEC+ fold, and two, Angola's refusal to step in line with the other members, stating matter of factly that not only would it not offer voluntary cuts starting in January like its peers, it wouldn't be sticking to its current quota either. Angola's quota was reduced in June along with other African nations to be more in line with their actual performance. Angola did say a week ago that it was not considering leaving the cartel.

The market will have a difficult time digesting the convoluted nature of the cuts as traders attempt to determine what are new production cuts, what are existing cuts, and whether they will manifest with actual fewer barrels produced at the beginning of the year, and if so, how much less. The group's complicated and long, drawn-out arrangement-and its propensity for either over or underproducing its professed cuts, has soured the market on believing what OPEC+ says is true. Angola's refusal to play ball, combined with Brazil's addition to the group rollover cuts, only complicates the issue further. It could take a few days for the market to digest the reality of today's agreement. In the meantime, Saudi Arabia appears to be the one "ouching like hell."

Deals, Mergers & Acquisitions

Equinor has agreed to sell its business in Nigeria, including its stake in the Agbami oilfield, to Chappal Energies. While the terms of the deal haven't been disclosed, Equinor said that its Nigeria business has been "very profitable," and it expects to book a gain at deal closing. The deal includes the sale of ENEC, which holds a 53.85% ownership of OML 128 and a 20.21% stake in Agbami.

Activist investor group Elliot Investment Management has snapped up a $1B stake in Phillips 66, citing the US refiner's underperformance in recent years. Elliot said it saw a 75% upside to the current price. The activist investor blames Phillips 66 for shifting its focus away from its refining segment, missing the refining supercycles over the last two years.