From disclosing potential oil production level changes to revealing discrepancies between reported and actual supply, the most recent OPEC+ meeting held last weekend provided invaluable insights to traders in the oil market.
Here are the three most important takeaways:
1. OPEC+ plans to keep its current production levels through the end of 2023—sort of.
Officially, OPEC+ agreed to keep the current mandatory production cuts through the end of the year and to maintain the extra, voluntary production cuts that some members committed to in April. On top of that, Saudi Arabia announced an additional, unilateral cut of 1 million barrels per day for the month of July.
2. Actual oil on the market from OPEC+ producers doesn’t match production levels on paper.
The real issue for traders is how much oil OPEC+ members are actually putting on the market, not how much oil OPEC+ quotas and voluntary production cuts indicate should be on the market. The more voluntary cuts are piled on top of the agreed-upon quotas, the more confusing the situation becomes for the market.
For example, several OPEC countries are not producing up to their quotas because they lack the capacity to do so. Other OPEC+ members that committed to making voluntary cuts may not be following through. While Nigeria, Angola, Algeria, Congo, and Iraq are all under-producing their quotas, Russia may be over-producing from the 500,000 bpd voluntary cut it committed to in April.
The confusion and lack of clarity also reduce the impact that OPEC+ messaging has on the market. For example, when OPEC+ announced production cuts in October 2022, the price of Brent jumped to $93 per barrel.
In April, the surprise voluntary cuts caused a 7% increase in oil prices, though two weeks later, those gains were erased. This week, oil prices only rose 1.9% after the announcement and lost those gains by Tuesday.
This means that traders really cannot trust what OPEC+ countries say they will produce and instead need to watch export levels and other indicators of production to get an accurate picture of how much oil is on the market. This can be difficult when it comes to Russia, which has decided to stop reporting production and export numbers.
3. OPEC+’s baseline production quotas will change starting in 2024.
This important story has gotten lost in the drama of Saudi Arabia’s unilateral cut but is something that traders need to be aware of. Even though OPEC+ did not agree to cut production, they did renegotiate the baseline production quotas for participating countries to reflect production capacity more accurately.
Certain African countries accepted decreases to their production quotas because they are no longer able to produce as much oil as they used to, and other countries, like the UAE, secured higher baseline production quotas that reflect investment in new production capacity. These quotas will go into effect in 2024 and will hopefully bring much-needed clarity to OPEC+ production.
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Disclosure: The author doesn't own any of the instruments mentioned in this report.