How do you solve a problem like OPEC?

Sadly, No Vienna Conflab

It’ll all be online next Thursday when OPEC and allies meet to decide how much to pump next year amid a sharp decline in crude prices. OPEC+ wranglings continue behind the scenes ahead of the delayed meeting, now to take place on Nov 30th. It’s all about baselines. Nigeria and Angola can’t meet their current quota but don’t want to accept lower formal quotas for next year. They would like higher supply quotas than the provisional agreement in June, when OPEC dealt with higher agreed output from the UAE by lowering targets for African countries that were not achieving quotas. Nigeria has raised output quite a bit (about 300k bpd) in the last year, so should be in a stronger position to get its way. Angola is a trickier case and there is a small, non-negligible chance it could leave the group, though is far from the base case for this meeting.

Who is Cutting?

The Saudis and Russia will almost certainly maintain their extra cuts – the Saudis’ unilateral 1m bpd cut extended through the first half of next year maybe to put a floor under expectations. But Saudi’s 1m bpd ‘lollipop’ has not worked as well as it would have hoped so the question is whether it needs to do more. Prices in the low $80s is where they have in the past announced cuts. The problem for OPEC heading into 2024 becomes two-fold: not just rising supply from the likes of Brazil and Guyana, and record output from the US despite everything we hear about the Biden regime; but also the prospect of waning demand. Remember China’s demand this year – despite the headlines – has hit a record 13.2m bpd in October. And next year the prospect of a slowdown in global growth as rate hikes bite is a very real fear. And supply issues only grow – Russian exports and volumes from Iraq are on the rise, too, while Iran has ramped its exports. Critically though we have seen a shift in the supply balance – growth ex-OPEC from Guyana, Brazil and the US has shown OPEC doesn’t have the iron grip on the market it once commanded. Even if Saudi Arabia extends its production cuts in 2024 the oil market will return to surplus, according to the International Energy Agency.

What’s OPEC Done So Far?

A number of OPEC+ members agreed in April to cuts of 1.66m bpd. This had limited impact so the Saudis added the lollipop – a 1m bpd unilateral cut starting in July through the end of 2023. This came in tandem with Russia saying it would cut exports by 300k bpd from August through the end of 2023. This was in addition to an existing pledge to cut 500k bpd all the way to the end of 2024. The Saudis are now producing about 9m bpd and could maybe go to 8.5m bpd if they can take other members with them. There are various permutations for extending or deepening cuts but wrangling over baseline quotas needs to be squared away first.

What to Expect

So, OPEC is in a tough place and baseline negotiations can take time – in 2021 it took two weeks to break the deadlock. But it’s tougher now and discord leads to volatility in prices, as we have seen in the last couple of days. Options markets went crazy- put options for Brent hit 211k on Wednesday, a record high. Talk of an extra 1m bpd worth of cuts being on the table has done the rounds – less a 1973 embargo and more a signal to Israel and the US about what’s going on in the Middle East; GCC members have shown unusual unity. Prices are down around 15% from the September peak and hit a 4-month low this week as the meeting was postponed, though have recovered some ground since the initial spike lower. There is a low bar for disappointment this time and this meeting may reflect the harsh reality for OPEC and its allies: output (and prices) may be lower for longer.

Elsewhere

Japan core inflation rose 2.9%, higher than the previous month but this was lower than the 3.0% expected. USDJPY steady in the area a little below 150 for now. Stocks were steady in Europe this morning after the US was shut for Thanksgiving – half day today on Wall Street should keep things pretty quiet. The FTSE 100 lagged though and shed about a third of a percent in early trading to retreat further from the 7,500 handle and trend line, whilst the DAX was flat a little below 16k. Happy Friday: The Pentagon is moving closer to allowing AI weapons autonomously decide to kill humans, according to The New York Times. I’m sure our capacity for killing each other on an industrial level will only improve. It’s the classic arms race – you can’t let your enemy get the advantage.