OPEC: To Cut or Not to Cut
To cut or not to cut, that is the question.
I’m talking about OPEC, not the Federal Reserve—but both groups should read Hamlet’s soliloquy and contemplate the perils of hubris.
OPEC planned to gradually relax about 2 million barrels per day of production cuts beginning in October. Now, it’s considering delaying that move after oil prices hit their lowest level in nine months.
OPEC abandoned its sensible hands-off approach to oil markets in early 2017, choosing instead to wade back into the murky waters of market manipulation. It’s presumptuous to believe that the world’s largest commodity market can be managed. It is governed by forces far beyond OPEC’s control.
Last year, Saudi Energy Minister Abdulaziz bin Salman warned speculators against playing games with the oil market, saying, “I would just tell them: Watch out!” It seems only OPEC thinks it’s clever enough to pull the strings. But I bet he and his OPEC colleagues are starting to realize they should take their own advice and watch out, especially as they ponder their next move.
Superficially, OPEC’s role might seem simple enough: control production to balance the market.
“We just watch supply, demand. If there is a shortage of supply, our role in OPEC+ is to fill the shortage. If there is oversupply our role is to measure that for stability of the market.”
Forget all the rhetoric about market stability; it’s always been about the price of oil. OPEC came into being amid a wave of Arab nationalism, aiming to overturn colonial practices that had kept developing countries from fully capitalizing on their own resources. From the start, OPEC’s moves were more about shaking up the status quo than about smoothing things over. The oil shocks of the 1970s weren’t about stability; they were about flexing newfound power. And when oil prices tanked in 2014, OPEC’s inaction caused more chaos than calm. Stability has always been a convenient cover for what’s really at play: control of the market and the price of oil.
OPEC’s decisions are driven primarily by their internal demand forecasts, rather than external factors. Those demand forecasts have been at considerable variance with projections by the IEA (International Energy Agency) and EIA (Energy Information Administration) throughout 2023 and much of 2024.
“While the IEA has consistently reduced the 2030 oil demand projection in its STEPS scenario and the EIA has reduced its demand projection in the most recent IEO [International Energy Outlook], OPEC’s WOO [World Oil Outlook] has moved in the opposite direction, generally increasing its projection.”
The problem is that supply and demand are little more than rough guesses. You can’t just plug in every country’s production, consumption, and exports into some neat formula. The data isn’t there, and it never will be. The bigger issue is that supply and demand are purely transactional measures—storage barely factors in. It’s not counted in supply, and it only shows up in demand when inventories are reduced. It’s a blind spot that throws off any attempt to get a clear picture of the market.
The pitfall in OPEC’s price-defense strategy is that higher prices encourage oil companies to take on more risk and ramp up drilling. Figure 1 shows that Brent crude has averaged nearly $89 per barrel since January 2022. It also highlights key events that have affected oil prices. While geopolitical tensions have been the primary driver of higher prices, OPEC+ production cuts have also played a significant role.
Source: CME & Labyrinth Consulting Services, Inc.
OPEC faces a paradox: its attempts to prop up oil prices ultimately result in increased supply, which drives prices down again.
It also grapples with another issue: holding back production results in a loss of market share. That provides a different lens through which to see why OPEC may opt to go ahead with relaxing production cuts at its next meeting.
“The scheduled production increases mark a change of strategy by OPEC+, led by Saudi Arabia, which had previously focused on depleting excess inventories and driving prices towards $100 per barrel. Instead, the group has switched its focus to stabilising, or even regaining, some of the market share it has lost in the last two years to rival producers in the United States, Canada, Brazil and Guyana.”
Despite repeated official and voluntary production cuts, prices have not increased as much as OPEC had hoped—though they likely prevented a steeper drop. Instead, these cuts have provided a lifeline to U.S. shale and other higher-cost producers, encouraging them to sustain or even boost their output. Shrinking market share may have become too painful and controversial to maintain, stirring uncomfortable memories of Saudi Arabia’s role as a swing producer in the early 1980s.
Starting in 1981, Saudi Arabia slashed its production by 6.7 million barrels per day in a bid to counter falling oil prices caused by reduced demand during a global recession (Figure 2). By 1986, the Saudis, along with their OPEC allies, gave up on trying to defend prices and opted to ramp up production to regain lost market share.
Source: EI & Labyrinth Consulting Services, Inc.
Maybe 2024 is the year OPEC+ should consider a graceful exit from its misguided attempt to control global oil prices. Markets aren’t infallible, but trying to fight against them is like swimming upstream—eventually, you’re going to get swept away.
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Bonsoir Art.
Avez vous vu le dernier papier de Jean Laherrère sur le Moyen orient?
Voici le lien:
https://aspofrance.org/2024/08/23/middle-east-crude-oil-production-forecast/
Quel est votre point de vue?
Ce papier pourrait il expliquer le comportement de l OPEP (pays du golfe)
Merci d’ avance pour votre réponse.
Joye,
Je connais Jean depuis de nombreuses années et je lui ai dit que ses méthodes étaient presque aussi anciennes que lui et moi!
Tous mes vœux,
Art
Bonjour Art,
Un peu d humour.
Je sais si cette expression française existe aux USA.
” C est dans les vieux pots qu’ on fait les meilleurs confitures”
Plus sérieusement sur un de vos postes il y avais un lien sur les réserves de L Arabie Saoudite d une étude de Goehring et Rozencwajg.
Expliquant un OIP de 530 -560 GB et des réserves ultimes de 430 GB avec un taux de récupération de 73-78%% ce qui déjà très haut.
J ai remarqué que souvent l Arabie Saoudite produisait environ 40 % de brut de la Région Persique je suppose en lien avec les quotas et ded réserves.
Du coup 430 Gb × 2.5 = 1075 GB.
Avec un Minimum de 650 GB étude Jean Laherrère et un Maximum de 1075 Gb
J admet que c est un raisonnement avec aucune réalité du terrain, de la géologie et des procédés industriels.
J’ essaye d’avoir un ordre de grandeur.
Merci pour le travail d informations et de partager vos données.
Romain,
J’ai comparé les réserves mondiales de Jean avec celles de Rystad et j’ai constaté que les siennes étaient en fait optimistes. Je ne connais pas grand-chose à la fabrication de confiture.
All the best,
Art
Why do you think Warren Buffet plunged into OXY and CVX in recent times when he never had significant holdings of oil stocks in the past? Since he’s a ling term investor, how does this comport with longer term outlookfor oil demand and prices?
Steve,
I’m not a psychologist but I wouldn’t assign much worth to what Buffet does with two oil companies and the future of the oil demand and prices.
All the best,
Art
Is regaining lost market share a valid argument? I thought refineries were more picky with regard to the blend of crude oil than a vinologist to wine. Are the different blends of crude oil that interchangable?
And if – according to OPEC – crude oil consumption will increase in the (near?) future, why would you sell your oil now, if you can sell it for a much higher profit later on?
Could the drop in oilprice – besides the Camala Harris doctrine – also be directed at the shale oil producers who can not easily decrease production, to cause a fracking shake-out?
Bart,
If a company withholds its product and revenue, it isn’t good for the company unless it pays off in the end with higher prices. Higher prices isn’t happening so what’s the alternative?
All the best,
Art
I guess this time OPEC is too early in their moves. We are not ramping up production on a globa scale. It’s more or less shale (which is at the cusp of decline), Canada (who are unable to get meaningful more Oil&Gas out of their country) + some Brazil & Guyana (that’s ramping up slowly). The rest of the world is more or less in decline or its not enough investment to keep production stable.
Had they waited another 9-12 month they would have achieved their goal. Can hardly imagine anything that will help against the pricing power OPEC will have end of 2025.
Rolf,
I don’t think oil markets can be managed, and OPEC was deluded to think that they could do it.
All the best,
Art
First – I always enjoy reading your Posts an Blog. Very useful information and thaugts!
But concerning Pricing Poweer of OPEC – for me it’s all about supply and demand. And investments in very long-term development projects. I can no longer see these investments in any western nation – the pressure from environmental organizations is too great and the governments are too clueless.
This massively impairs the elasticity of the supply curve. It was very elastic in the days of the shale revolution – and when the oil majors still dared to invest in higher production. But those days seem to be over.
We’ll see how things turn out at the end of 2025. In any case, I’ll be filling up my heating oil supply in the cellar before then.
All the best
Rolf
Rolf,
It’s never about supply and demand, really. It’s about inventory levels, credit markets and affordability.
All the best,
Art