Oil extraction

Oil Prices Keep Falling as OPEC+ Cuts Fail to Spark Market Reaction

Dec 7 2023

On Thursday last week, OPEC+ announced extensions to voluntary production cuts for early 2024. The oil market in 2023 has been rocked back and forth by the competing forces of suppressed macroeconomic demand and OPEC’s strategic production cuts aimed at bolstering prices. While earlier measures saw Brent Crude futures nearing the $100 mark in late September, a subsequent 20% price drop over two months indicates a more complex scenario, with OPEC+'s recent announcement seemingly unable to reverse the downward trend.

OPEC+ Announcement

Last Thursday, OPEC+ revealed plans for substantial output cuts, totaling around 2.2 million barrels per day (bpd) for the upcoming year. This includes Saudi Arabia and Russia extending their existing cuts of 1 million and 300,000 bpd respectively. Other members like the UAE and Iraq have also pledged significant reductions. However, skepticism lingers about the practical implementation of these cuts. Countries like Angola, which generates around 90% of its export revenue from its oil and gas industry, have expressed reluctance to adhere strictly to OPEC quotas, highlighting the challenges in cohesive policy enforcement among member nations. As reported by Bloomberg, Angola’s OPEC governor Estevao Pedro said in an interview that “it is not a matter of disobeying OPEC; we presented our position, and OPEC should take it into consideration.”

Oil Demand Outlook

The decision to cut supply draws attention to varying demand forecasts for 2024. There's a stark contrast between OPEC+'s projection of a 2.25 million bpd demand increase and the International Energy Administration's more conservative estimate of 930,000 bpd growth, though this figure has been revised up from 800,000 bpd. The disparity between these projections, amounting to about 1% of daily global oil consumption, underscores the uncertainty stemming from the juxtaposition of 2023’s industrial gloom against 2024’s potential economic growth spurred by interest rate cuts.

For example, U.S. Factory orders fell 3.6% in October, marking the biggest monthly drop in roughly three and a half years, while the nation’s PMI figure declined from 50 in October to 49.6 in November, indicating a contraction in activity. In China, meanwhile, November PMI numbers came in below expectations; the manufacturing PMI was recorded at 49.4 against an expectation of 49.7 while the non-manufacturing PMI was 50.2 against expectations of 51.1. Conversely, Reuters reported comments from ECB board member Isabel Schnabel that the bank could consider interest rate cuts next year due to the fall in inflation witnessed this year. The economic data published for the final quarter of 2023 will be crucial in shaping market sentiments as we enter the New Year.

Crude oil stocks

U.S. Production Filling the Gap

Amidst these developments, the United States continues to ramp up its oil production, reaching record levels. Recent data from the U.S. Energy Information Administration shows that U.S. crude and condensate production increased by 224,000 barrels per day (b/d) to 13.24 million b/d in September from August, according to Reuters.  This surge in production is contributing to growing IEA stockpiles of crude oil, as shown in the image above. Simultaneously, over the past 2 months 18 new oil and gas rigs have been added across North America, according to Baker Hughes. Ultimately the demand, supply and price of oil all need to be considered within the context of next year’s presidential election in the U.S. Fuel costs often become a critical issue on the campaign trail. so it will be in the interest of the Biden administration to do everything possible to keep oil and gasoline prices under control over the next year.

Freight Rates on the Rise

A notable risk factor in the current oil market scenario is the volatility in freight rates. Reports emerged from the US Navy last weekend that Houthis had targeted three commercial vessels in the Bab el Mandeb strait with drones and ballistic missiles. The Baltic Dry Index, a measure of freight-costs for dry bulk, has increased dramatically in recent weeks, as shown in the graph below. Since November 1st, the BDI has increased by over 120%. The Baltic Clean Tanker Index has also climbed recently, but its increase since the start of November stands at only around 9%.

Bdi underlying

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