The Opec+ group of oil producers has agreed to cut its October output by 100,000 barrels per day, reverting to August production levels to support prices, with the slowing global economy posing demand headwinds and a potential Iran nuclear deal bringing more crude to the market.
The decision to cut output quotas was made during an online meeting on Monday. The group will hold its next meeting on October 5 to gauge market dynamics, it said in a statement.
Last month, Opec+ agreed to increase output by 100,000 barrels per day for September, as it recalibrated production amid continued price volatility, fears of a recession and supply constraints caused by the Russia-Ukraine conflict.
“In view of current oil market fundamentals and the consensus on its outlook”, the group decided to “revert to the production level of August 2022 for Opec and non-Opec participating countries for the month of October 2022”, the statement said.
“The upward adjustment of 0.1 million bpd to the production level was intended only for the month of September 2022.”
The alliance said it will consider calling for an Opec and non-Opec ministerial meeting “anytime to address market developments, if necessary”.
Oil prices have remained volatile in recent weeks, slipping from recent highs of more than $123 per barrel.
Brent, which rose to a notch under $140 per barrel in March after Russia’s military assault in Ukraine, has given up most gains but is still more than 24 per cent higher since the beginning of this year.
The benchmark fell almost 8 per cent last week, touching a low of $91.60 per barrel, but started this week on a positive note in anticipation of the Opec+ move to support prices.
Brent, the benchmark for two thirds of the world’s oil, was trading 2.60 per cent higher at $95.44 per barrel at 9pm UAE time on Monday. West Texas Intermediate, the gauge that tracks US crude, rose 2.46 per cent to $89.01 a barrel.
“The Opec+ decision … was an expected move as they look to address a recent price decline caused by macroeconomic headwinds,” said Srijan Katyal, global head of strategy and trading services at Abu Dhabi-based brokerage ADSS.
Prices for oil futures are likely to rally in the short term and the “upsides may persist in the medium term as well, as cuts from Opec+ signal that the coalition is more focused on risks associated with a deteriorating demand outlook”, he said.
UBS strategist Giovanni Staunovo said with "Europe cutting its imports from Russia and SPR [strategic petroleum reserve] sales ending, we continue to expect the oil market to tighten over the coming months".
"Hence, we forecast Brent to rebound to $125/bbl by year-end."
The return of Iranian crude, if Tehran agrees on a nuclear deal with the US and its western allies, could add more price volatility. However, it is not clear if or when Iran will be able to strike a deal with the West.
The plan by Group of Seven countries to introduce a price cap on Russian oil will also add to uncertainty in the market. The world’s seven largest economies are trying to limit what Russia, an integral part of the Opec+ alliance, earns from the sale of crude as they look to punish Moscow further for its military assault on Ukraine.
However, it remains unclear how the cap will be enforced and which countries will agree to it. China and India, the two most populous countries and the world’s top and third-biggest importers of crude oil, respectively, buy Russian crude and are unlikely to join the G7 alliance.
“Russia is not Opec’s only geopolitical headache. There is also the possibility of a nuclear deal between the US and Iran,” said Ipek Ozkardeskaya, senior analyst at Swissquote Bank.
“Opec doesn’t want to see … Iranian oil hitting the market, and pulling prices lower. Therefore, they could well use the excuse of an eventual deal to cut output, again.”
Even if additional supply comes to market, Opec+ is equipped to deal with the challenges in the volatile crude market and can also cut production if required, Saudi Arabia’s Minister of Energy Prince Abdulaziz bin Salman said in August.
The 23-member group, led by Saudi Arabia and Russia, has become “stronger and more cohesive than ever” amid the “challenging environment”, he said at the time.
The current Opec+ agreement on production adjustments ends at the end of this month and from then on, group members can adjust their output in line with their view of market conditions.
“Opec+ has the commitment … and the means within the existing mechanisms of the Declaration of Co-operation to deal with such challenges and provide guidance including cutting production at any time and in different forms as has been clearly and repeatedly demonstrated in 2020 and 2021,” Prince Abdulaziz said.
“Soon we will start working on a new agreement beyond 2022 which will build on our previous experiences, achievements and successes.”
On the demand side, Opec has lowered its global oil demand forecast for this year, citing the impact of the continuing Ukraine war, coronavirus pandemic-related movement restrictions and the impact of inflation on the global economic outlook amid a slowdown in the Chinese economy.
Oil demand is expected to rise by 3.1 million bpd in 2022, down 260,000 bpd from the previous forecast. Global oil consumption in 2022 is projected to average 100 million bpd, the group said in its monthly market report in August.
“All in all, this means that even if the demand side is pushing crude prices lower, Opec wouldn’t let the prices drop too much below the actual levels,” Ms Ozkardeskaya said. She added that a new “wave of output restrictions” can send the price of a barrel back above the $100 mark.
Abu Dhabi Commercial Bank does not rule out production cuts “if global economic momentum weakens further or if an Iran deal is reached”, said Monica Malik, ADCB chief economist.
Meanwhile, a slowdown in China, the world's second-largest economy, which continues to enforce movement restrictions to control the spread of coronavirus as part of its “zero-Covid” strategy, is adding to global economic woes.
The strengthening of the US dollar against a basket of major currencies has also “added concern” to the market, since it makes oil more expensive for international buyers, Opec said last month.
“Market sentiment has been dominated by worries about the global economy and the pace and extent of US Fed interest rate hikes required to tame multi-decade high inflation,” the National Bank of Kuwait said in a report on Monday.
“The release of weak Chinese industrial, consumer and oil import/consumption data soured the outlook,” Kuwait's biggest lender said.