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David Gaffen
Editor, Energy Markets |

Hello Power Up readers! OPEC shot off its gun this week, electing to cut its targeted output by 2 million barrels per day, a move that rippled across oil markets and into the White House. Let’s break it down here.

OPEC Chops Production

Cartel cuts despite tight world inventories

So these conversations didn't really pan out for the United States.
OPEC+ cut its output target by about 2 million bpd. That was at the top end of the numbers bandied about before the meeting, much to the chagrin of consuming nations, particularly the United States, which tried to press the cartel not to cut output.
OPEC is dealing with an uncertain demand scenario in China, the possibility of a recession, rising interests and a strong dollar as it tries to calibrate supply with demand. However, the move opened OPEC up to criticism from consuming countries, where high energy prices have already hit growth.
Wednesday's cuts won’t entirely come to a drop in 2 million barrels of supply, because OPEC+, which includes allies like Russia, was already about 3.6 million bpd short of its output target in August - estimates range from 600,000 bpd to 1 million bpd. But that’s still a large figure.
Goldman Sachs notes that OPEC has never cut in a market this tight - noting that OECD stocks are about 8% below the five-year average, more than at any time dating to at least 1998, though demand is weak.

The Russian and Saudi Secret

Big producers could face slowdowns anyway

Graphic by David Gaffen
One under-discussed aspect of the move by OPEC+ to reduce its targets (and actual production) is that the second- and third-largest worldwide crude producers, Russia and Saudi Arabia, could see output fall in coming months anyway, according to JP Morgan analysts.
Why? For starters, Saudi Arabia has never sustained production above 11 million bpd for more than a month or two, ever - prior to this, its brief surge in production during the short-lived Russia/Saudi oil war in 2020 was its last time it pushed output that high. JP Morgan analysts say the more sustainable level is 10.6 to 10.7 million bpd, so about a 300,000 to 400,000 bpd decrease.
Russia tends to oppose cuts in output, wanting to get as much as they can for what they produce. But that opposition is “counterbalanced by challenges facing the country's oil production due to Western sanctions on its energy and financial sector,” writes Natasha Kaneva, JP Morgan strategist, who sees Moscow having to cut production by about 600,000 bpd by December as well.
The country, due in part to the coming outright oil ban from the European Union and a price cap in the works led by the United States and other countries, is unlikely to be able to replace all of its exports to the EU and other places through shipments just to India and China. That, along with the financial squeeze its economy is facing, also augurs for lower production.
So this could mean that the output out of those two countries was already set to decline - and that makes up the lion’s share of the cuts that come from OPEC in coming months.

Shale Sits On Its Hands

Big producers don’t plan on boosting output

More drilling? Maybe. Maybe not. The Permian basin in Mentone, Texas. REUTERS/Angus Mordant
Part of the reason OPEC sees itself as perhaps having more leverage than in years past has been the response to high prices from U.S. shale companies.
The independent oil companies operating in west Texas, New Mexico, North Dakota and other places had a bit of a patriotic response at a Houston energy conference in March when Moscow invaded Ukraine, promising a lot to try to keep oil supply stable worldwide, with Hess Chief Executive John Hess saying “It’s very important for the U.S. to stand tall here and insure the energy security for the country and the world.”
They’ve largely demurred on that, instead growing production extremely slowly and not really risking the big profits they’ve garnered with prices surging above $100 a barrel for a good chunk of the year. Overall output is up this year by about 450,000 bpd, but that’s far less than some expected, and short of the 2019 record levels. To be fair, RBN Energy analysts note that “E&Ps face a number of challenges, including inflation, severe shortages of labor and material, soaring energy costs.”
And even at this late date, the big shale companies are still saying they’re not planning on adding more output, pointing to high labor costs, lack of equipment and uncertain path for demand in coming months. "I don't know of any producer that looks at the possible production cuts and says, 'I have an opportunity to fill that,'" said Andy Hendricks, CEO of driller Patterson-UTI.

So, How Has the Market Reacted?

Oil is up, but for how long?

That's Brent crude and the 50-day moving average, which is being tested! (Refinitiv Eikon data)
The reaction to OPEC won’t be clear for a while - be it a few days or weeks; already high costs of fuel, rising interest rates, and the energy crunch in Europe may end up tempering any rise in oil prices.
In the last few days, crude futures have gained 7%; but that still just puts the market at levels reached a mere three weeks ago. Charts do not suggest that the market has broken the steady downtrend it has been in since early June, much of which was driven initially by a big speculative trade that helped push crude to $120 a barrel.
One other good signal for the outlook for the market is the forward curve, that is, looking at the current futures price versus, say, a contract expiring in six months. For months the latter has been much lower than the former, a sign of worry about current supply. After Moscow invaded Ukraine, that spread surged to more than $20 - basically, a freakout about current supply. It dropped in August to between $3 and $4 a barrel. Lately, that spread has been rising again, most recently to more than $7.
In normal times, that’s a very high number. And it still suggests worry - but the market did not see the spike it saw back in February. Which also means the market is watching and waiting, and also worried a lot about demand.

Higher Prices Will Hit the Poor Most

"This is not just an issue faced by us but several other South Asian countries. Global inflation is going to hit us all next year."
Sri Lankan President Ranil Wickremesinghe, in remarks to parliament, as it deals with its worst economic crisis in 70-plus years

U.S. Looking to Venezuela?

Wrangling over sanctions continues

Venezuela's opposition leader Juan Guaido addresses the media, in Caracas, Venezuela, last month. REUTERS/Gaby Oraa
Following OPEC’s decision to reduce its production target by about 2 million bpd, the United States, per the Wall Street Journal, is considering reducing some sanctions on Venezuela that would allow operations there - specifically run by Chevron - to get moving again.
However, officials were quick to deny that on the record, saying there are no changes to plans without any “constructive steps” from Venezuela’s President Nicholas Maduro to restore democracy. And as Reuters’ Marianna Parraga reported, Venezuela’s opposition leader, Juan Guaido, has asked for details on Chevron’s expanded license request.
The United States did get part of what it wanted from the South American oil producer, as Caracas released a number of U.S. detainees of late.
It is possible the United States will ramp up discussions to get more oil pumping - but Venezuela’s oil capacity remains severely degraded. Chevron has reached a preliminary technical agreement with state-run PDVSA to revamp their joint ventures, but that still requires U.S. government approval - and Washington still wants talks between Maduro and Guaido to resume after 2018 elections widely derided as a sham.
Sustainable Business
African countries will use the COP27 climate talks in Egypt next month to advocate for a common energy position that sees fossil fuels as necessary to expanding economies and electricity access, said Amani Abou-Zeid, the continent's top energy official. Seen as a renewable hub given its vast solar, wind and hydrogen potential, Africa also has around 600 million people in its sub-Saharan region living without electricity and almost 1 billion citizens without access to clean energy for cooking.

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