All eyes on next OPEC+ meeting amid price volatility
The thesis is that exogenous shocks be they geopolitical or economic result in volatility. Recent developments in the global oil market prove the statement.
After hostilities in the Eastern Mediterranean broke out at the beginning of October oil temporarily rose to above $92 per barrel on Oct. 19, reaching a four-month low of $77.42 on Nov. 16 just to end at $81.40 on Monday midday CET. Despite geopolitical turbulence, the oil price dropped nearly 16 percent between its pre-war high on Sept. 27 and this week Monday with significant oscillation.
What happened: It was the uncertainty on where the conflict on the Eastern Mediterranean would go, market factors, and price taking of investors (hedge funds) that got us where we are today. Indeed, for the first time in months, oil is in contango, a sign of a rather bearish market.
During the summer most analysts expected a demand overhang for the last quarter of 2023. Economic data from China was softer than expected and gave rise to concerns. US unemployment benefits reached the highest level in two years. According to the Energy Information Administration, US oil stocks rose by 3.6 million during the week ending Nov. 12. This is more than double the forecast and can in part be explained by the fact that US refiners have less demand during the seasonal maintenance period. According to the International Energy Agency, global inventories rose by 9.9 million barrels during the month of September.
OPEC has steadied the ship with prudent policies such as the 1.3 million extra and voluntary supply cuts by Saudi Arabia and Russia.
This is not just a tale of demand it is also a tale of supply. While the Organization of the Petroleum Exporting Countries and its allies, known as OPEC+, produced marginally below their production quota and the Saudi/Russian extraordinary cuts were extended until the end of the year, producers outside the OPEC+ alliance, namely the US, Brazil, Kazakhstan, Guyana, Norway, and others are boosting output.
This leaves the question of what OPEC+ will do when ministers meet on Nov. 26 in Vienna. The organization has been airing on the side of prudence with its cuts in June and the voluntary extra cut by Saudi Arabia of 1 million barrels per day, which was carried forward to the end of this year.
Ministers will decide on the facts and market mechanisms. We have seen that oil prices moved on-demand expectations and real non-OPEC supply growth, as well as profit-taking of financial investors. OPEC has steadied the ship with prudent policies such as the 1.3 million extra and voluntary supply cuts by Saudi Arabia and Russia, which were carried over until the end of 2023. Given current circumstances, analysts expect Saudi Arabia and Russia to take the cuts forward into 2024. The question remains whether and how the OPEC+ quotas will be adjusted. OPEC+ fared well to be on the cautious side with its production quotas. In the end, the OPEC+ policy has helped keep volatility somewhat in check.
The real enemy of consumers and producers is less the actual price level than volatility, because the latter makes planning impossible. Consumers and producers need to be able to plan both OPEX and CAPEX. When it comes to capital expenditure/investments it is crucial that investors can get predictable assumptions. The world will need investments worth trillions of dollars in the oil and gas sector until 2045 in order to keep the world sufficiently supplied with energy and wild price swings are not conducive to investors’ confidence.
- Cornelia Meyer is a Ph.D.level macroeconomist, energy expert and CEO of Meyer Resources, a business consultancy.