The supply and demand game is about to get tense. Where will the oil price go?

After the international oil price continued to fall, OPEC+ chose to ignore the U.S. warning and vigorously reduce production. On October 5, local time, OPEC’s 45th Joint Ministeria…

After the international oil price continued to fall, OPEC+ chose to ignore the U.S. warning and vigorously reduce production.

On October 5, local time, OPEC’s 45th Joint Ministerial Monitoring Committee (JMMC) and the 33rd OPEC+ Ministerial Meeting were held in Vienna, Austria. It was decided that starting from November 2022, OPEC+ will increase its total daily oil production to Downgraded by 2 million barrels.

OPEC+ also announced that it would adjust the frequency of meetings of the Ministerial Supervisory Committee from once a month to once every two months, and adjust the frequency of ministerial meetings to once every 6 months. It also authorized the JMMC to hold additional meetings or convene OPEC+ ministers. power of the meeting. OPEC+ will hold its 34th ministerial meeting on December 4.

Before this meeting, OPEC+ decided to increase production by 100,000 barrels per day in September, and then decided to reduce production by 100,000 barrels per day in October, so the October production target is actually exactly the same as August. In December, it officially entered “production reduction mode.”

The effect of OPEC+ production cuts can be described as immediate. In the third quarter, both Brent crude oil and WTI crude oil fell by more than 20%. Oil prices have returned to the level before the outbreak of the Russia-Ukraine conflict at the end of February, and WTI crude oil even fell below US$80 at one point. Driven by expectations of OPEC+ production cuts, international oil prices have risen by about 10% this month. Currently, Brent crude oil prices have risen above US$93/barrel, and WTI crude oil prices have risen above US$87/barrel.

The game between oil-producing countries and consuming countries is about to begin

While international crude oil prices have weakened in the past few months, domestic retail gasoline prices in the United States have also fallen sharply. American drivers who spent more than $5 a gallon at the pump this summer now spend less than $4. If gasoline prices surge again, it will do great harm to Biden’s Democratic Party and may cause both houses of Congress to change hands to Republicans.

It should be noted that OPEC+’s decision to vigorously cut production is only about a month before the U.S. midterm elections. For Biden, who just visited the Middle East not long ago, OPEC+’s move may cause U.S. gasoline prices to rise again, and the Democratic Party will face another midterm election. Negative.

Therefore, before OPEC+ made its final production decision, Biden launched a comprehensive pressure campaign in an attempt to persuade OPEC+ at the last minute not to significantly cut oil production. The White House described the prospect of production cuts as a “complete disaster” and warned that OPEC+ production cuts could be viewed as a “hostile act.”

But in the end, OPEC+ ignored the U.S. warning and chose to use production cuts to defend high oil prices and its own interests. At the first offline meeting after the outbreak of the COVID-19 epidemic in 2020, energy ministers from many countries gathered in Vienna, the capital of Austria, and officially made the largest production reduction decision since the COVID-19 epidemic.

On the other hand, the United States has also taken some response measures. The White House stated that Biden was disappointed with the “short-sighted behavior” of OPEC+’s decision to cut oil production. The U.S. Department of Energy will release 10 million barrels of strategic petroleum reserves in November. To protect American consumers and promote energy security, Biden may continue to dump reserves “appropriately.”

In addition, the Biden administration will negotiate with Congress on how to reduce OPEC+’s control on energy prices, and the “Combatting Crude Oil Production and Export Monopolies Act” (NOPEC) may reappear on the U.S. agenda. The bill, which would enable the U.S. government to sue OPEC members for manipulating energy markets and potentially seek billions in damages, has broad bipartisan support in the U.S. Congress.

What is the effect of OPEC+’s vigorous production cuts?

It should be noted that although OPEC+ announced a production reduction of 2 million barrels per day in November and December, the actual production reduction is far less than this.

Because of the previous lack of production increases, many countries’ oil production is already well below their quotas, so they do not have to reduce production anymore. Iranian Deputy Oil Minister Amir Hossein Zamaninia made it clear that the baseline of 2 million barrels per day of production cuts is the same as the previous OPEC+ agreement.

Overall, OPEC+’s actual production cut may be slightly less than 1 million barrels per day. Amena Bakr, chief OPEC reporter at energy research company Energy Intelligence, said that from November, total OPEC+ production will be reduced by 2 million barrels per day, but the actual production reduction will be slightly less than 1 million barrels per day.

Goldman Sachs estimates that OPEC+’s effective net production cuts in November and December this year will be only 400,000 to 600,000 barrels per day, mainly from OPEC countries in the Persian Gulf region such as Saudi Arabia, Iraq, Kuwait, and the United Arab Emirates.

Nevertheless, the 180-degree turn from production increase to production reduction is still good for oil prices. After the announcement of OPEC+ production cuts, Goldman Sachs raised its oil price forecast and raised its Brent crude oil price forecast for the fourth quarter of this year by US$10 to US$110. /bucket. Goldman Sachs believes that OPEC’s decision to cut production from November to December is “very positive” for the oil market.

Despite rising concerns about economic recession in Europe and the United States, the demand side of the oil market is actually performing reasonably well. OPEC maintained its forecast for strong growth in global oil demand in its September monthly report, predicting global oil demand will increase by 3.1 million barrels per day in 2022 and 2.7 million barrels per day in 2023. OPEC said that despite adverse factors such as soaring inflation, demand in major economies was better than expected.

The International Energy Agency (IEA) also predicts that oil prices will increase this year and next.Demand will continue to grow. The IEA predicts that global oil consumption will increase by 2 million barrels per day this year to 99.7 million barrels per day, and demand will continue to increase by 2.1 million barrels per day in 2023 to 101.8 million barrels per day.

After OPEC+ implements vigorous production cuts, international oil prices may once again exceed the US$100 mark in the fourth quarter. JP Morgan said a rebound in demand, continued underinvestment in capital expenditures by energy companies, the continued inability of Iranian oil to enter the market and OPEC production cuts could allow oil prices to surge back above $100 per barrel in the fourth quarter of this year.

Zhu Runmin, a senior economist in the petroleum industry, analyzed to a reporter from the 21st Century Business Herald that the basic characteristics of international crude oil prices are “severe fluctuations in the short term, cyclical in the medium term, and an upward trend in the long term.” In the short term, oil prices have fluctuated violently. Under the influence of the global macroeconomic situation, they have not yet reached a mid-term cyclical high. In the long term, oil prices still have room to rise in the era of supply shortages.

For the future, unpredictable geopolitical risks are also expected to support oil prices, and Russian production may continue to decline. The EU will suspend the purchase of most crude oil from Russia from December 5 this year, and the EU’s ban on Russian petroleum products will take effect from February 5 next year. The International Energy Agency said that as the EU import ban takes effect, the decline in Russian oil production will accelerate. By early 2023, Russia’s production will be close to 2 million barrels per day, a drop of about 20%.

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Author: clsrich