George Hay, Karen Kwok, Breakingviews, Reuters

LONDON
EnergiesNet.com 11 30 2023

Brazil nuts.

OPEC+ may be about to get bigger. The 13 members of the Organization of the Petroleum Exporting Countries and 10 allies like Russia are keen to invite Brazil into their club, Reuters reported on Thursday. OPEC+ is giving a real-time example of why the Latin American state probably shouldn’t.

One interpretation of the role of OPEC+ is that it balances the oil market. If that’s all it did, it would probably not be contemplating augmenting cuts that have already taken 5 million barrels off its daily capacity of just under 50 million barrels, around half of global annual production. According to Morgan Stanley analysts, world oil demand is likely to grow by 1.2 million barrels a day in 2024. That’s pretty much the same amount as the U.S. bank reckons oil supply from non-OPEC countries like the United States, and Brazil itself, will increase. To maintain oil prices around $80 a barrel, OPEC+ doesn’t have to do anything.

Instead OPEC+ has decided, also on Thursday, to increase the volume of global daily cuts by 2 million barrels. That headline number is vague – another frustrating feature of the club’s announcements. Part of the pre-existing daily cuts are 1 million barrels that Saudi Arabia has been doing voluntarily since earlier this year, as part of its oil minister Prince Abdulaziz bin Salman’s “lollipop” to sweeten the market. The net increase in daily cuts may well be therefore more like 1 million barrels, but even that is likely to be an overestimate. Plenty of OPEC members don’t always manage to hit their quotas anyway, and the latest reductions appear to be voluntary.

It may be that Brazil has a very pessimistic view of global oil demand next year, necessitating bigger cuts. Brasilia may also like the price bump an excessively tight market might lend to its own 3 million-plus barrels of daily supply in 2024. As for Saudi Arabia, OPEC’s biggest producer and de facto leader, its budget balances nearer $90 a barrel and higher oil prices mean it makes more money.

Still, what’s good for Saudi is not always good for the rest of OPEC. The cuts mean OPEC+’s market share has fallen 220 basis points over the last year, according to Morgan Stanley. The likes of the United Arab Emirates want to be pumping more oil, not less, and have chafed at OPEC’s restrictions. Most of all, unveiling largely superfluous reductions at a time when geopolitical tensions have risen due to wars in Ukraine and Israel is a great way to incur the wrath of the United States, still the world’s most powerful nation. All of which suggests Brazil should say thanks, but no thanks.

Context News

OPEC+ oil producers on Nov. 30 agreed to voluntary output cuts approaching 2 million barrels per day (bpd) for early 2024, Reuters reported, citing sources.

OPEC+ sources told Reuters the latest agreement would involve Saudi Arabia extending a voluntary cut of 1 million bpd it has had in place since July. Russia will cut 500,000 bpd and others will also contribute cuts, one source said.

Algeria’s energy minister told Reuters his country had agreed to curb its output by 50,000 bpd. Brazil is also set to join the OPEC+ group of oil-producing countries which includes Saudi Arabia and Russia from January, an OPEC+ delegate told Reuters on Nov. 30.

Brazil President Luiz Inacio Lula da Silva’s office told Reuters that the country has received the invitation but has yet to respond. Oil prices fell after rising by more than 1% earlier in the session after OPEC+ producers agreed to the cuts.

Benchmark Brent crude for February futures were down 3% to below $81 a barrel at 1634 GMT on Nov. 30.

breakingviews.com 11 30 2023