2mbpd output cut for Nov: Experts hail OPEC+, say its decision was a strategic response to price volatility
Oredola Adeola
The decision of the Organization of the Petroleum Exporting Countries (OPEC) and its allies to reduce oil production by 2 million barrels per day, i.e 2 percent of current global oil supply, has been justified by experts who revealed that the cut was a response to rising interest rates in the West and a weaker global economy.
The OPEC+ had in a statement made following the 33rd OPEC and non-OPEC ministerial meeting on 5 October, said it would reduce overall production by 2 mb/d, starting from November 2022.
The oil cartel claimed that the supply adjustment was being made in light of the uncertainty that surrounds the global economy and oil market outlooks, and the need to enhance the long-term guidance for the oil market.
Experts disclosed that the move comes in the context of a global economic downturn, the war in Ukraine, and the recent G7 cap on the price of Russian oil exports, as part of a new sanctions package against Moscow.
They noted that OPEC has only reduced production in excess of demand to avoid market price volatility, which has global supply outlook implications.
According to them there is a gross imbalance in the market. They noted that slower global growth and higher inflation has curbed demand for oil, hence the need to cut supply.
EnergyDay’s check showed that OPEC’s supply cut saw the price of international benchmark Brent crude futures Brent crude oil rise 1,5% to more than $93 a barrel during Wednesday afternoon deals in London, the US West Texas Intermediate futures, meanwhile, stood at $87.37, almost 1 per cent higher.
Analysts projected that oil prices would cross $100 per barrel. They also speculated that Brent would reach triple digits over the next three months, before climbing to $105 over a six-month horizon.
Professor Wumi Iledare, Professor Emeritus in Energy Studies, Louisiana State University, USA, who is also a Ghana National Petroleum Corporation Research Professor, in a conversation with EnergyDay said OPEC+, as an organisation has only optimised its capacity for the security of global oil supply by reducing production in excess of demand to avoid market price volatility.
He noted that the market price volatility, if allowed to prevail, has global supply outlook implications on the oil cartel, which has in the more recent years, become an incremental supplier of crude oil to meet global demand.He said, “It is a fundamental market concept driving OPEC decisions rather than geopolitical rhetoric.
“The release of some oil from the Strategic Petroleum Reserve, SPR, in the US is also an attempt to influence the global supply, which is also a legitimate action with geopolitical implications beyond future crude oil market dynamics.
“It is ironic, therefore, for the US President Joe Biden to ask and expect OPEC+ to increase production when demand is declining and price is falling. Demand is rising and price is rising because supply is not rising fast enough,” Prof. Iledare said.
He also noted that it is not ideal for the market to be saturated with oil beyond the market clearing price.
According to him, “The public perception of OPEC within the context of oil price dynamics is misleading. It is not objective to assume that the OPEC decision to cut oil production will lead to the collapse of the global economy.
Professor Iledare however said that managing the supply aspect of the global oil market is a legitimate responsibility of OPEC+ to ensure posterity blessings of oil for all.
Dr. Boniface Chizea, Managing Consultant, BIC Consultancy Services, an economist in a chat with EnergyDay said OPEC as a cartel has the right to defend the interest of its membership of which Nigeria is a notable member.
He noted that the decision of OPEC to cut global oil supply by 2 percent has saved the oil producers from being exposed to the manipulation of developed countries of the world, whose best interest it is to source crude at the lowest possible price in the best interest of their respective economies.
He said, “Therefore oil market presents a veritable game of wits between the producers on the one hand and consumers on the other hand.
“OPEC is worried with the sudden and rapid fall of the price of crude due to uncertainty in the market, The oil producers have taken a bird’s eye view of development across various economies of the world, thanks to inflationary pressure.
“It is no brainer to surmise that in such a situation that the oil market is bound to be soft. If that happens, then going simply by demand/supply dynamics, price can only go southwards.
“This must be the optics from which the recent cut in production decision must be viewed. We must also bear in mind that these decisions are supported with robust analysis and reviewed by experts retained at OPEC Secretariat. Therefore there is limited guesstimate in these decisions which reflects objective assessments of market trends.
Dr. Boniface noted that the development is a zero sum game for the rest of the world, adding that OPEC’s gain is obviously a loss to the world.
He said, “Joe Biden, US President is on record to have observed that a decision to reduce supply is a wrong decision to be taken at this point in time.
“Fortunately, OPEC is fully sensitised to the fact that there is limit to which it could cause price to increase after which it might hurt its own interests.
“As is known by most, there are crude sources that are expensive to tap such as tar. But such marginal fields become viable at some price levels. Therefore there is a point where logically the interest of consumers for lower price coincides with the interest of producers to checkmate volumes of production from non OPEC sources,” he said.
Dr. Boniface however noted that Nigeria has not been able to officially meet its OPEC quota due to the corruption and particularly theft which has surrounded daily crude production volumes in Nigeria.
He lamented that Nigeria is unfortunately in a unique negative situation when it comes to trying to infer how developments in the oil market will impact the economy.
This, according to him, is because Nigeria, a major oil producer, criminally imports all the refined products it consumes. He insisted that that ugly narrative must change sooner than later, if the country is concerned about benefiting from OPEC’s decision.
Dr Omar Farouk Ibrahim, Secretary-general of APPO, the African Petroleum Producers Organisation, who made a comment on the side-lines of the just concluded Africa Oil Week in Cape Town, South Africa said the recent decision by OPEC to cut production by around 2% was a decision well taken.
According to him, I believe it is the right thing to do to save the industry and also to ensure that there is stability for today and tomorrow.
Dr Omar APPO said, “Every country has a responsibility to protect the interests of their citizens and if by reducing production, they see it as serving their best interests, so be it. When developed countries make decisions, they don’t sit and think [about] how it is going to affect developing countries. The interest of their citizens is paramount.”
Dr Ibrahim’s comments reflect a growing assertiveness among African oil producers that the region has the right to chart its own energy course.
