OPEC is facing growing challenges in its efforts to boost oil prices amid record output outside the alliance, particularly in the U.S., raising questions about how long the alliance can maintain its deep production cuts. OPEC and its allies, OPEC+, failed to reach a unanimous agreement Thursday on cuts, even after delaying the meeting by five days in an effort to shore up unity within the alliance. Instead, seven members announced voluntary, unilateral cuts to the tune of 2.2 million barrels per day for the first quarter of 2024. The outcome is a “bittersweet victory” for OPEC kingpin Saudi Arabia, wrote Jorge Leon, senior vice president of Rystad Energy, in a note Thursday. Riyadh convinced members to share some of the burden in cutting. But the failure to secure a formal agreement “does not bode well for the group’s unity and cohesion and limits the group’s ability to balance the market,” Leon wrote. With oil prices down more than 14% since September highs, traders were hoping that OPEC could provide a boost. So far, however, the cuts are not having the intended effect oil on prices. U.S. crude fell more than 2% Thursday, while Brent dropped 0.3%. Oil futures were down more than 2% on Friday. Traders are disappointed that the cuts are short term, just one quarter, and worried that OPEC+ will not be able to hold itself together, Leon wrote in a note Thursday. OPEC+ is increasingly struggling to coordinate large reductions given the size of cuts already in place and the limited impact they are having on prices, JPMorgan analyst Natasha Kaneva wrote in a note Friday. In the end, Saudi Arabia may have only one option — launch a supply war by flooding the market with oil. “They could just add two and a half million barrels into the market for six months and just flush it,” Paul Sankey, a top oil market analyst and president at Sankey Research, said on CNBC’s ” Fast Money ” Thursday. Oil below $60 on supply war? The Saudis face two problems — restlessness within the OPEC+ ranks on the cuts and record production outside the alliance, particularly in the U.S. Oil producers outside OPEC+ are pumping oil at record levels and can now cover global demand, which which has forced the Saudi-led alliance to cut to keep the market balanced in their favor, according Kaneva. John Kilduff, founder of Again Capital, thinks the Saudis are fighting a losing battle with the U.S. Riyadh is currently producing 9 million bpd compared to 13 million bpd in the U.S. And record production outside OPEC comes at a time when demand growth is faltering in China, Kilduff said. “They have a big problem on their hands,” Kilduff said of Saudi Arabia. “They have their hands full and to me it’s not going to prove to be a winning strategy for them,” he said of the output cuts. Sankey said the Saudis would need to dramatically slash prices to keep production from growing in the U.S and regain market share. This would require pushing crude below $60 per barrel because that is the price U.S. producers are planning for right now, Sankey said. The Saudis already came close to “burning the house down” this week as they struggled to get OPEC+ members in line, Kilduff said. Given the challenges facing OPEC+, the group’s exit strategy from the current cuts is now in sharp focus, Kaneva wrote in a November note. If Saudi Arabia and Russia return 1.3 million bpd to the market in April, the price of Brent would average $77 per barrel in 2024 and $57 per barrel in 2025, according to Kaneva. This would trigger a slowdown in drilling and fracking activity in the second half of 2024, shaving off about 170,000 bpd of U.S. production growth, she wrote. In 2025, U.S. liquids production would be flat compared to JPMorgan’s baseline of 740,000 bpd of growth. Compliance under scrutiny For now, the focus is on whether OPEC+ will actually come through with the cuts promised Thursday. The 2.2 million bpd in voluntary cuts from the coalition of the willing is somewhat deceiving. Saudi Arabia, for example, simply rolled over its current 1 million bpd cut, while Russia increased its export curbs – not production – by 200,000 bpd to 500,000 bpd total. In reality, the new cuts to production for the first quarter total about 700,000 bpd total from Iraq, the United Arab Emirates, Kuwait, Kazakhstan, Algeria and Oman. Goldman Sachs, for its part, declined to change its oil price forecast on the OPEC decision as the investment bank waits for “clarity on compliance with cuts and additional inventories data.” Goldman still expects OPEC to keep Brent in a range of $80 to $100 a barrel in 2024. But compliance with voluntary cuts is a “stress test” of whether Brent will maintain an $80 floor, analyst Daan Struyven wrote. A slowdown in U.S. supply growth in 2024 is another major assumption supporting that price floor. One downside risk to the $80 floor would be persistent upside surprises in crude inventories particularly in the U.S., according to Goldman. Global inventories rose by 300,000 bpd on average in October and November, while Goldman had forecast a decline of 700,000 bpd. And then there is the problem of OPEC unity — or lack thereof. “The further rise in spare capacity and the voluntary nature of today’s cut imply that additional large OPEC+ cuts in response to any additional inventory beats become increasingly difficult to implement,” Struyven wrote.
Saudi Arabia is struggling to boost oil prices, raising possibility of supply war with U.S.
