Opec’s cut: Not enough?

The immediate reaction to Opec’s meeting outcome has surprised many. Brent and WTI edged lower after the cartel announced substantial additional cuts up to 2.2 million barrels per day – with the cuts lasting till (at least) end of 1Q 2024. But investors were buying none of it, as Brent crude oil closed lower for the sixth straight week.

Recall that the delayed meeting had raised concerns that all is not well with Opec members, as African nations had reportedly not agreed to proposed plans of production cuts. The delayed meeting thus became more important than before – and it did deliver a substantial cut – much higher than previous attempts by Opec Plus group – which had led to significant bull rallies. But what was different this time?

It appears that the voluntary nature of the announced cuts has been the real dampener – with skepticism around member countries’ compliance throughout 1Q 2024. The announced cut of 2.2 bpd is inclusive of the existing 1.3 million bpd by Russia and Saudi Arabia announced earlier this year – which have been rolled over to 1Q 2024.

Opec controls 40 percent of world’s oil production and announcing to wipe off more than ever before for a full quarter is a big deal. But the immediate market reaction seems to have stemmed from members other than Saudi Arabia and Russia, joining the voluntary cut. Mind you, compliance has not been a big issue ever since Opec announced production cuts earlier in 2023 – and most of the existing production cut led by Russia and Saudi Arabia is voluntary in nature. The concern revolves around smaller member countries’ ability to comply with announced cuts with same degree, but that may well be over blow.

Confusing and unclear communication emerging from Opec secretariat is also being blamed by some quarters for the lack of anticipated market reaction. The clarity around the base of production cuts is missing and it may well take at least a month of actual production data for the market to be entirely convinced of compliance by the group for the entire first quarter of 2024.

On the other hand, the US rig count continues to grow – with five more added last month – taking the rig count to highest since September. But demand projections for 2024 appear firm – and Opec’s cut, if met with good compliance, should give more fuel to the bulls to be back in the driving seat.