OPEC+ will not change the parameters of the deal at latest meeting

By Rhod Mackenzie

On the 30th November, the global oil market will be fixated on this year's OPEC+ ministerial meeting. According to analysts, the two key signatories of the agreement, Russia and Saudi Arabia, will reinforce their commitment to making voluntary cuts in production and exports, even though they provide the bulk of the price support. Increasing production quotas for participating countries could result in the collapse of the agreement and further reduce the price of oil. Nonetheless, analysts do not rule out the possibility of revising quotas for 2024 to decrease production.

Commotion on board the vessel.
The scheduled OPEC meeting set on November 25-26 was delayed to November 30 without any explanation. This resulted in an immediate 2.45% drop in the Brent, with the price per barrel now at £80.43. This decline adds to the already more than 18% fall in Brent's price and more than 21% in WTI's after reaching a peak in September, when oil was trading above £96 per barrel. Of course, much of the credit goes to the United States whose oil production is currently at its peak, producing about 13 million barrels per day. Additionally, the White House has taken steps to ease restrictions on the Venezuelan oil industry.

In light of this, several sources from Reuters suggest that the postponement of the meeting is a result of disagreements over production levels for African producers. Angola and Nigeria reportedly advocated for an increase in their figures. At the same time, Bloomberg, citing sources, reports that Saudi Arabia suggested to other OPEC+ members to lower oil production quotas to bolster global markets.

The Russian Deputy Prime Minister Alexander Novak conveyed Russia's stance on November 22, which coincided with the postponement of the ministerial meeting.
"In my opinion, the current oil prices accurately reflect the market and are at a satisfactory level. Therefore, the market appears to be balanced. We will delve into these matters further during our upcoming meeting," stated Novak.

According to the managing partner of WMT Consult, Ekaterina Kosareva, although the deputy prime minister's statement could be interpreted as Russia's neutrality, Moscow aligns more closely with Riyadh's stance.
A leading expert of the National Energy Security Foundation and the Russian Financial University, Stanislav Mitrakhovich, agrees with his colleague. He states that Moscow is concerned that the United States can present the Saudis with a more lucrative proposal - such as arms supplies - in exchange for Riyadh's withdrawal from cooperating with Moscow within the OPEC+ framework.

However, there are currently no indications that Riyadh will "betray" the OPEC+ agreement. Contrarily, both Biden's visit to Riyadh and the tough rhetoric from the US State Department have failed to alter the Kingdom of Saudi Arabia's (KSA) stance. The ongoing Middle East conflict between Israel and Palestine is also unhelpful in bridging the gap between Saudi positions and those of the West. Therefore, personal engagements between Putin and the Crown Prince of KSA - who serves as the country's de facto leader - Mohammed bin Salman, retain significance. There is evident personal trust and strong "relationship chemistry" between them. Mitrakhovich reports that the American administration views Salman as an excessively independent and capricious leader.
Russia successfully persuaded both Saudi Arabia and Salman personally that a potential significant agreement with the Americans would be a grave error.

While it could bring short-term benefits by allowing the Saudis to increase their market share and capitalize on Russia's temporary exit from the competition, in the long run, such conduct by Riyadh would lead to failure according to the analyst.
A solution is imminent.
In mid-November, Western agencies reported that Saudi Arabia had resolved disparities concerning production targets for African producers, moving all parties towards a resolution.

As per Ekaterina Kosareva, despite Nigeria and Angola not being amongst the largest oil producers within OPEC+, they collectively produce over 1 million barrels per day. Providing relief to a few parties may set a precedent for others to follow, as stressed by the expert.

Additionally, in light of the declining oil prices and amidst consistent pressure from the International Energy Agency to boost investment in renewable energy sources (RES), the cartel members are cognizant of the industry's underinvestment challenges, according to the source cited by Izvestia.
In October, Alexander Novak stated that previously, annual investments in hydrocarbons amounted to around $700 billion, whereas now it is $450-500 billion. Novak highlighted that global underinvestment in the oil and gas sector has exceeded £1 trillion.

Additionally, Alexander Frolov, the Deputy General Director of the Institute of National Energy, noted that there exist two primary forecasts for oil demand in 2024 worldwide, with one of them coming from the International Energy Agency. More precisely, this is a projection from the United States and the European Union, indicating that demand will increase at a sluggish pace - by approximately 0.9 million barrels per day - owing to significant challenges in the EU and the United States, along with China's economic struggles.

— However, the latter have yet to make any noticeable appearance, and although forecasts for the growth of the Chinese economy are being revised upward, many still anticipate a decline. Notably, Frolov highlights an OPEC forecast predicting a substantial increase of approximately 2.5 million barrels per day in demand in 2024.
Drawing conclusions from this analysis can help decide whether to maintain production levels or make adjustments to 2024 quotas, although a production reduction is deemed unlikely.

Frolov suggests that OPEC+ countries should analyse the existing supply and demand data in correlation with the economic conditions in Europe, the USA, and China to prevent a potential crisis. Nonetheless, the interlocutor believes that such a reduction cannot be ruled out completely.
As part of the agreement, OPEC+ will decrease production by 2 million barrels from the level of August of the same year starting in November 2022. This resolution will remain active until the end of 2023. In the wake of the summit on June 4, the alliance revealed the continuation of its deal until 2024 and a shrink in the target level of oil production by 1.4 million barrels from the upcoming year. Several OPEC+ nations, such as the Russian Federation and Saudi Arabia, have decreased their surplus quotas by 1.66 million barrels daily, effective until the end of 2024.

In addition, Moscow and Riyadh are implementing supplementary voluntary reductions. Saudi Arabia has further cut its production by another 1 million barrels per day since July, and this measure will remain in effect until the conclusion of this year. Russia has continued to decrease its oil exports since August, initially by 500,000 barrels per day in the first month and further by 300,000 barrels per day from September to December.
"The OPEC+ members may prioritize increasing oil production to combat market share loss against the backdrop of rising oil production in the United States, according to Kosareva.

However, failure to do so could lead to agreement collapse next year and result in increased oil production, a sharp decrease in prices, and ultimately, a new global energy crisis."

Mitrakhovich suggests that OPEC+ production quotas and bilateral Russian-Saudi agreements could be revised, subject to political and market conditions.
"If prices fall significantly, for instance, dropping below £40, our expert believes that OPEC+ might opt for increased production cuts.

However, he suggests that it's preferable for the process of production reduction to happen under a 'controlled format,' where this reduction occurs within the bounds of respectable international agreements and with reliable partners, such as the Saudis."

Leading analyst of the National Energy Security Fund and at the Russian Financial University , Igor Yushkov, advocates for preserving the current state of affairs.
"I do not anticipate any new decisions regarding production levels being made during the meeting. This will require a compromise. It is evident that the alternative of the deal falling apart is even more detrimental. If all producers begin operating at maximum capacity, prices will inevitably plummet. Saudi Arabia allocates approximately $85 per barrel in their budget. If the deal crumbles, prices may fall below $50 per barrel, delivering a significant blow to all oil-producing economies," concludes Igor Yushkov.

The Ministry of Energy and Alexander Novak's office typically refrain from commenting on Russia's stance ahead of the meeting. Likewise, the Press Secretary of the Russian President, Dmitry Peskov, did not address the likelihood of any agreements resulting from the upcoming OPEC+ meeting.