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Irina Slav

Irina Slav

Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry.

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Oil Price Gains Limited By Lack Of Clarity About OPEC+ Cut

  • On Wednesday OPEC+ agreed to cut its production targets for November by 2 million bpd, a figure that was larger than most analysts had expected.
  • While oil prices did climb, the gains have been limited by a lack of clarity about exactly how much oil will be removed from markets.
  • Despite the lack of clarity, the cut is undoubtedly bullish for oil markets and banks are once again predicting that Brent will break $100.

After OPEC+ yesterday agreed to cut production by 2 million bpd, oil prices rose but in a much more limited way than many would’ve predicted as it remained to be seen how much of the cut would be physical and what the U.S. would do in response to the move.

“The market wasn’t thrilled since the actual cuts would be half what the headline number suggests,” Velandera Energy Partners CFO Manish Raj told Market Watch.

Goldman Sachs went further, estimating the actual production cuts at half a million barrels daily because of the gap between targets and output.

Indeed, OPEC+ has been undershooting its own production targets for months, with the August figure at over 3 million barrels daily. This led some analysts to suggest that the production cut agreed at this meeting would be more of an attempt to move targets closer to actual production than anything else.

Until it becomes clear whether OPEC+ will be cutting actual production or moving targets, the price rally forecast ahead of the meeting in Vienna on Wednesday will probably wait.

Regarding the reaction of the United States, there has been a signal from President Biden that the likely response would be to release yet more crude from the strategic petroleum reserve. The Biden administration needs low fuel prices and it needs them now and over the next month until the midterm elections.

Despite the lack of details about the implementation of the production cut, Goldman raised its oil price target to $110 per barrel of Brent for the final quarter of the year. JP Morgan also suggested Brent could rebound to $100 in the current quarter, following OPEC+’s move to cut.

Meanwhile, headwinds remain, the strongest among them being the fear of a global economic slowdown, with recessions expected for some of the world’s biggest economies such as Germany. These headwinds are likely to put a cap on any price rises unless supply shrinks significantly.

By Irina Slav for Oilprice.com

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  • Mamdouh Salameh on October 06 2022 said:
    If crude oil prices reacted mildly to OPEC+’s cut of 2.0 million barrels a day (mbd), it is because of the ambiguity about the real size of the cut.

    The global oil market has interpreted the cut as no more than balancing the books as a result of OPEC+’s under-production in the previous four months and therefore what is announced as a 2.0 mbd cut could boil down to 500,000 barrels a day (b/d) or no cut at all. In a nutshell it is a brilliant act of wizardry by the organization.

    The Biden administration who described OPEC+’s decision as short-sighted, is at loss of how to respond. It can neither raise its shale oil production to offset OPEC+’s cut because US shale is a spent force nor would it release more oil from its strategic petroleum reserve (SPR). The SPR, currently at 427 million barrels, is at its lowest since 1984. Furthermore, the US Department of Energy (DoE) will find it virtually impossible to replace previous SPR releases because of the tightness of the market.

    The current fundamentals of the global oil market along with China’s easing up its lockdowns and opening up to the global oil market will still see oil prices resuming their surge with Brent crude hitting $110 a barrel before the end of the year. Brent could even hit $115-$120 if Russia halts its oil exports to countries implementing the cap on the price of Russian crude exports.

    Dr Mamdouh G Salameh
    International Oil Economist
    Global Energy Expert

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