A week ago, no one anticipated the sudden uncertainty gripping the oil markets. The steadfast support for production cuts within the OPEC+ group appeared unshakable, with little indication of any discord before the widely expected meeting on Sunday to extend production cuts into the new year.
However, fast forward seven days, and that solidarity has crumbled, contributing to a fourth consecutive weekly drop in oil prices, exacerbated by lackluster trading in Friday’s post-Thanksgiving session.
All eyes are now fixed on Thursday’s virtual meeting in Vienna, where Saudi Arabia is leading the push to dissuade undisclosed African producers from exceeding their quotas and cheating by producing more than agreed upon.
African OPEC members are advocating for higher production quotas, while Saudi Arabia, which has voluntarily reduced output by one million barrels per day, seeks further production cuts from the group. The issue of non-compliance with agreed production quotas has been an enduring problem for OPEC.
This latest rift has clearly unsettled Saudi Arabia and its Russian counterparts, who are striving to elevate prices. However, their efforts are hamstrung by a combination of ample supply, particularly from the United States, and weak demand. Moreover, the prospect of reduced consumption in the coming year looms if the global economy continues to decelerate.
As a result, both US West Texas Intermediate (WTI) and global Brent crude ended lower on Friday, reflecting uncertainty surrounding the solidarity of the OPEC+ cartel as African nations clamor for higher quotas amid falling prices due to weakening demand.
WTI crude oil for January delivery closed down $1.56 to settle at $75.54 per barrel, while January Brent crude, the global benchmark, concluded down 84 cents at $80.58. Both crudes ended the week down less than 1%.
The division within the 23-member group has intensified the pressure on oil prices, which have slumped 18% since their peak on September 27. This decline can be attributed to dwindling demand in developed economies, driven by high interest rates, coupled with rising production from non-OPEC+ countries, particularly the record-breaking output of 13.2 million barrels per day from the United States.
Despite the recent discord, some believe that OPEC unity will ultimately prevail. Helima Croft, Head of Global Commodity Strategy and MENA Research at RBC Capital Markets, expressed in a note that the current collective and unilateral cuts are likely to be extended, with a deeper reduction requiring further negotiation.
Reports from Bloomberg and Reuters indicate that Nigeria, Angola, and Congo are seeking increased production quotas, while Saudi Arabia is urging other members to lower production to bolster prices. To maintain unity, Saudi Arabia may need to negotiate by raising quotas for smaller producers and absorb the additional barrels through an increase in its voluntary cut.
Adding to the challenges are the ongoing rises in US oil stocks. The Energy Information Administration reported an 8.7-million-barrel increase in US inventories last week, with production remaining steady at 13.2 million barrels per day. Weakness in the US domestic oil market, exacerbated by declining demand from refineries and unfavorable refining margins, further contributes to the bearish sentiment.
In another development, US drillers increased their active rig count for the second consecutive week. Baker Hughes data revealed a four-rig uptick in the five-day period from November 18 to November 22. Although US oil rig numbers held steady at 500, gas rigs increased by three to 117. While the oil rig count averaged a decrease of four in November, gas rig numbers remained stable. Despite the recent increases, the total US rig count remains significantly lower than the previous year, with a 21% decline.
These shifting dynamics and uncertainties are casting a shadow over the oil markets, leaving observers eager to see the outcome of Thursday’s critical OPEC+ meeting and its potential impact on oil prices.