Oil Surges After Saudis Make Additional 1 Million Bpd Voluntary Production Cut
As expected oil has moved sharply higher upon the reopening of trading, WTI was last up around 3% at just over $74 and is likely to rise more now that Saudi Arabia has made it very clear that the mid-$70s is a red line, and the price of oil will not be allowed to drop even if it means temporarily conceding Saudi market share to other OPEC members.
While we expect a more powerful commodity squeeze in the coming hours, the real pain will be in energy stocks, whereas Goldman’s Prime Brokerage showed, the net exposure is the lowest it has been in three years amid aggressive hedge fund selling and shorting which is about to reverse, to wit: “Hedge funds accelerated selling in US Energy amid price declines this week. This week’s notional net selling in US Energy was the largest in 10 weeks and ranks in the 97th percentile vs. the past five years.”
And for those who missed the action earlier, here is a recap of what happened via Goldman’s commodities team:
Today’s OPEC+ meeting was moderately bullish, on the net, with three main developments.
- First, Saudi Arabia pledged to deliver an additional 1mb/d unilateral “extendible” output cut in July (bullish).
- Second, the voluntary cuts from the 9 OPEC+ countries are scheduled to extend until December 2024, from December 2023 previously (somewhat bullish).
- Third, output baselines will be redistributed in 2024 from countries struggling to reach their targets to those with ample spare capacity (somewhat bearish output effect, but bullish cohesion).
It is important to put these decisions in the context of sentiment and positioning, which remain very weak and short. While the extra Saudi cut is worth +$1-6/bbl in terms of fundamentals, depending on whether the cut lasts 1-6 months, and whether strength in physical markets (borrowing a recession) should eventually boost positioning and prices, the delivery of Saudi’s first production cut within three months of a prior cut with stocks as low as today and the Saudi Energy Minister’s “whatever is necessary” (Draghi-like) quote signal the group’s commitment to continue to lean against the shorts and preemptively leverage its unusually high pricing power.
Overall, today’s moderately bullish meeting partly offsets some bearish downside risks to our December 2023 price forecast of $95/bbl, including supply beats in Russia, Iran, and Venezuela, and downside risks to China demand. Our balances and price path are under review until our next Oil Analyst.
OPEC+ members in Vienna have agreed to extend crude production cuts into 2024. In a statement, the cartel said that it was acting “ to achieve and sustain a stable oil market,” and that it was continuing its recent approach of being “proactive, and pre-emptive.”
Additionally, Saudi Arabia committed to an additional voluntary cut of 1 million barrels per day as part of this agreement, adding that they “will do whatever is necessary” to stabilize the oil market. Russia will extend its voluntary oil production cut of 500,000 barrels per day until the end of December 2024, Reuters reported, citing the Russian Deputy Prime Minister.
The main winner from the weekend’s talks is the United Arab Emirates, which gets a boost to its quota for next year. UAE Energy Minister Suhail Al Mazrouei thanked his colleagues for the hike to its quota and expressed the country’s loyalty to the cartel. “We will always support OPEC and will always stay together,” he said.
That comes at the expense of African members who were asked to give up part of their unused quota. While they’ve been falling short of their targets, it’s still a bitter political pill for them to swallow. That’s why talks dragged on so long, including some late-night sessions in Vienna hotels.
Bloomberg, Reuters and the Wall Street Journal have been barred from attending the headquarters for the meeting. Reporters continue to interview delegates on the sidelines. Secretary General Haitham Al Ghais said lots of journalists had been invited and defended the organization’s policy. “This is our house,” he told reporters. “OPEC has always had an open policy, transparent.” The next OPEC+ meeting will take place in Vienna on Nov. 26.
