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Wall Street Shrugs Off Latest OPEC+ Oil Cuts – WSJ

 Investors wary that Saudi-led group won’t stay on the same page in 2024
Investors wary that Saudi-led group won’t stay on the same page in 2024. Crude prices seesawed after the OPEC+ announcement. (Andrey Rudakov/Bloomberg)

David Uberti, WSJ

EnergiesNet.com 12 04 2023

Members of the oil-producers group known as OPEC+ have tried to push crude prices upward with unexpected supply cuts since last year. Wall Street isn’t yet convinced that will pan out.

On Thursday, a million barrel-a-day pullback surprised a market that had largely anticipated that the cartel and its allies would hold output steady. Crude prices seesawed after the announcement, ultimately slipping to their sixth-straight weekly drop, suggesting many traders were unsure if it was the surprise they wanted.

A key question, investors say, is whether the Riyadh-led Organization of the Petroleum Exporting Countries and its Kremlin-aligned counterparts can stay together amid an uncertain outlook next year. That could require smaller exporters to shoulder more of the burden by curtailing supplies and absorbing the resulting hit to revenues they use to fund development, security and social programs. 

While Thursday’s decision spread additional cuts across several producers, their voluntary nature led some traders to warn that they won’t be strictly enforced. They fear that Saudi Arabia, which unilaterally throttled production by one million barrels a day this summer, could open the spigots if its counterparts don’t follow through.

“At some point, [OPEC+ members] have to show the market that there is cohesion,” said Rebecca Babin, a senior energy trader at CIBC Private Wealth US. “The strength of the pack is the wolf. The strength of the wolf is the pack.” 

Signs of dissent appeared last week, when the group’s meeting was postponed from its original Sunday slot. Delegates from Angola and Nigeria pushed for higher production allotments, The Wall Street Journal reported, and those from Saudi Arabia argued for expanded cuts. 

Ultimately, the 23-member group rolled over many of its existing quotas, but members including Iraq, Kuwait and the United Arab Emirates announced voluntary cuts alongside extensions of separate restrictions by Riyadh and the Kremlin. 

Source: FactSet

The cartel said that it invited Brazil, one of the world’s fastest-growing oil producers, to join OPEC+.

On Thursday, oil prices initially jumped following the meeting but edged lower throughout the trading session as details dribbled out. The skid continued Friday as benchmark U.S. crude fell 2.5% to $74.07 a barrel, about 21% lower than its late-September peak. Energy stocks largely avoided the selloff.

Uncertainty heading into 2024 assures that the OPEC+ goal of stabilizing prices “will not be straightforward,” said Ann-Louise Hittle, an analyst at energy consulting firm Wood Mackenzie. 

Thursday’s cuts come as Washington reaches the late stages of its inflation fight and American voters enter a presidential election year. While average nationwide prices at the pump have fallen for 10 straight weeks, federal record-keepers say, gas stations monitored by AAA in Orlando, Fla., El Paso, Texas, and elsewhere have begun raising prices in recent days.

Investors who project that oil prices will rise next year argue that underinvestment in new drilling around the world will eventually choke off global supplies.

But three other batches of cuts by OPEC+ members since October 2022 have so far failed to push the market into that scenario. Benchmark U.S. crude prices have actually ticked lower since then alongside start-and-stop economic growth in China and interest-rate hikes by the U.S. Federal Reserve. 

Analysts who try to ballpark supply and demand by parsing everything from air-travel patterns to refiners’ stockpiles to drilling efficiency have increasingly projected a 2024 market that has more than enough crude. 

Drillers in the Permian Basin across West Texas and New Mexico are squeezing more oil out of shale rock than ever. Output from Guyana and Brazil has reached records. At the same time, Canadian producers are funneling more crude from the country’s oil sands to American refineries.

The gusher of supplies has left Wall Street watching how deep—and how long—OPEC+ will keep cutting. 

“A great deal will depend on whether Saudi Arabia and Russia continue to voluntarily constrain their production in 2024 and 2025,” J.P. Morgan analysts wrote to clients recently. 

Write to David Uberti at david.uberti@wsj.com

Appeared in the December 2, 2023, print edition as ‘Wall Street Shrugs Off OPEC+ Cuts’.

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