All eyes on OPEC+ when oil prices fall below $90

OPEC+ may have to make much deeper cuts in its collective oil output targets this winter as a recession looms over Europe as it grapples with a severe energy crisis and China shows signs of slowing oil demand.

The token cut of 100,000 barrels per day (bpd) announced this week is largely irrelevant to the oil market’s balance sheet. But it sent a strong message to the market that the OPEC+ alliance is back in price-watching mode and appears determined not to let oil fall too far below $90 a barrel, analysts say.

Fear of recession

After an initial bounce on the surprise ̵[ads1]1; albeit minor – cut to their production targets, the oil market saw the OPEC+ move as a concession to expectations of lower demand. This, combined with new “zero-COVID” policy shutdowns in China, weighed on oil prices on Tuesday and Wednesday. Brent Crude prices fell this week to below $90 a barrel – the lowest level since January, before the Russian invasion of Ukraine. Add to this the expected impending recession in major European economies – triggered by the energy crisis and skyrocketing prices – and the aggressive rate hikes by central banks, including the Fed, and the economic outlook for the world does not look good. now.

A recession in the Eurozone now appears likely due to the deepening gas crisis, Fitch Ratings so in a report last week, even before Russia said the Nord Stream gas pipeline to Germany would remain shut indefinitely.

While OPEC+ currently appears to be trying to defend $90 a barrel, they may have to cut production much deeper and could end up defending $50 a barrel early next year, Clyde Russell, Asia Commodities and Energy Columnist at Reutersclaims.

Supply uncertainty

The global economic downturn and a looming recession in Europe will weigh on oil demand and prices. But there are also major uncertainties in the offer. Therefore, even in an energy crisis-induced recession, the oil market may still be tight enough to support high oil prices. That’s because at the moment it’s anyone’s guess how the planned price ceiling on Russian oil will affect the markets, especially if Russia follows through on its threat to stop exporting its oil to importers who will have joined this cap mechanism.

Vladimir Putin stepped up on Wednesday and said that Russia would stop supplying all energy products to Europe if the EU and its western allies introduced price caps on Russian oil and natural gas.

“We will not supply gas, oil, coal, heating oil – we will not supply anything,” Putin said.

The planned price caps on Russian oil and gas exports are another “stupidity”, the Russian president said, adding that Europe has made “stupid decisions” and is now trying to figure out how to get away from them.

Another major supply uncertainty, this time a bearish factor for oil prices, is the possibility of a revival of the Iran nuclear deal, although recent developments point to a go “backwards” in the indirect EU-mediated talks between the US and Iran on a final draft of a possible agreement.

On the other hand, the always unpredictable Libya could stop exports again at any moment amid still unresolved differences over who has control and who should get the country’s most important export earnings – those from crude oil.

OPEC+ in price watch mode

Because of these uncertainties, it is no surprise that OPEC+ and Saudi Arabia in particular signaled that they would closely monitor developments in the oil market. The alliance has never publicly admitted that it prefers a certain price for oil, but right now it seems intent on not letting prices fall too much.

OPEC+ decided on Monday that it could convene a meeting at any time to discuss other actions. The group decided to “request the chairman to consider convening an OPEC and non-OPEC ministerial meeting at any time to address market developments, if necessary,” OPEC said.

By giving the alliance’s chairman, Saudi Arabia’s energy minister Prince Abdulaziz bin Salman, the power to call a meeting at any time if necessary, OPEC+ sent a strong message to the oil market: cuts can come at short notice, “in any form ». This may mean that unilateral cuts may not be off the table either.

Although the token cut for October does not change anything related to the fundamental supply/demand balance, OPEC+’s readiness to intervene when it deems necessary suggests that Saudi Arabia and other influential OPEC+ members believe that oil prices have seen enough selling in recent months already. . And they will fight to keep them “stable”. In other words, in the $90-$100 range.

As Brent prices fell below $90 on Wednesday with recession fears front and center, expect “verbal OPEC+ intervention next,” Ole Hansen, head of commodities strategy at Saxo Bank, so.

According to oil broker PVM Oil Associatesthe expected increase in oil production outside the OPEC+ alliance by the end of this year “pales in comparison to the potential supply shortage on the horizon.”

“And with the Iran nuclear deal still proving elusive and OPEC+ refraining from opening the taps, the prolonged upward trajectory in global oil supply may soon come to an end,” PVM Oil Associates said in a note on Wednesday.

“As a result, the current tightness may intensify during the last three months of the year. This should be taken as an early warning sign for those betting on further price declines in the year-end period.”

By Tsvetana Paraskova for Oilprice.com

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