OPEC+’s decision to maintain its hefty output cuts reflects a lack of stability in global oil markets, argued analysts.
The world’s most influential cartel alongside allies including Russia, together called OPEC+, yesterday decided to stick to their October plan to cut output by 2m barrels per day (bpd) from November through to 2023.
This comes against an uncertain backdrop of China’s zero-Covid approach and sustained sanctions on Russia from the West.
These factors are having contrasting effects of supply and demand, in market suffering from both supply shortages and reduced consumption appetite amid challenging economic headwinds.
Craig Erlam, senior markets analyst at OANDA told City A.M. that while OPEC’s decision was predictable, its consequences and the future direction oil markets was not.
He said: “We knew what level the price cap would be set at going into the meeting but what the knock-on effects of it would be is still unclear, although Russia may have been able to offer some reassurances. Then there’s China and its direction of travel on zero-Covid which is promising from a demand perspective, and finally the resilience of global economies to higher interest rates, the peak of which is still unclear.”
This meant OPEC was essentially delaying any further policy shifts, until the dust had settled and the direction of energy markets was clearer.
Erlam concluded: “Against this backdrop, I can only assume it was decided that time is what was needed to get further clarity and understand and should that necessitate a response, a meeting can always be arranged.”
Ole Hansen, head of commodity strategy at Saxo Bank, believed further updates would be unnecessary as the effects of a 2m barrels per day cut were yet to be felt.
He said: “There is volatility expected due to the EU sanctions and a G7 price cap on Russian crude which will go into effect this week, and further changes in China’s zero covid policy are also set to continue.”
OPEC+’s next meeting is in February 2023.
Prices are essentially unchanged from yesterday with both major benchmarks easing over the summer after Brent Crude climbed to a 14-year high of $139 per barrel in March.