Nov 28 / Victor Arduin

Energy Weekly Report - 2023 11 27

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"The OPEC+ must agree on the production cuts during 2024 since its energy consumption remains uncertain. Due to some countries not meeting their quotas, the OPEC+ meeting in July established independent consultants to assess the capacity of these countries to meet the stipulated production."

After delay, OPEC+ may announce measures to support oil prices

  • After a week of high volatility due to the postponement of the OPEC+ meeting, the main oil benchmarks are set to recover recent losses.
  • The production quotas for members of the African continent are one of the main points of discussion in OPEC+. Nevertheless, an agreement should be reached on November 30.
  • The macroeconomic environment for 2024 appears to be more favorable for the energy complex, but significant risks persist on the demand side, requiring actions from OPEC+ to support prices.

Introduction

OPEC+ meeting was initially scheduled for November 26, but due to internal disagreements, it had to be rescheduled for November 30. Despite the group sharing a common interest in the stability of oil prices, the delay was not well-received by the market, causing significant volatility last week.

Due to the group's economic and development level heterogeneity, some countries face more challenges in meeting the production quotas allocated by the organization. Countries like Congo, Nigeria, Angola and Equatorial Guinea are examples of this, as they were unable to reach the allocated production level in the past years and, therefore, received lower targets at the last June meeting of OPEC+.

Nevertheless, some of these nations are addressing their infrastructure issues and boosting their oil production. Therefore, the current challenge for the group is to reach a consensus on production levels for the upcoming year. For instance, Nigeria is currently producing close to its quota of 1.38 million barrels per day (bpd), but below the estimated 1.58 million bpd considered for the next year.

The announcements from the meeting scheduled for November 30 will be crucial to support to oil prices that have suffered significant losses in recent weeks. Despite last week's disagreements, OPEC+ is expected to reach a compromise with African oil producers on production levels for 2024.


Image 1: OPEC Production Versus WTI

Source: Refinitiv

OPEC+ members focus on the production level for 2024

Oil prices had a week of ups and downs, indicating a cautious sentiment toward the commodity. The postponement of the OPEC+ meeting hints at a misalignment among member countries, especially those in Africa. The production policy of these members for the upcoming year is at stake.

The OPEC+ must agree on the production cuts during 2024 since its energy consumption remains uncertain. Due to some countries not meeting their quotas, the OPEC+ meeting in July established independent consultants to assess the capacity of these countries to meet the stipulated production.

Image 2: October OPEC crude oil output and capacity (millions bpd)

Source: OPEC

Since then, African countries have been looking to increase their production to meet the quotas set by OPEC+. In this context, Nigeria has stood out for its rapid increase in oil extraction, as can be seen in the chart above.

This increase contrasts directly with the expected production cuts. The market anticipates a further reduction in production to be announced in the group's next meeting. Maybe it will be an unilateral measure by Saudi Arabia, which along with Russia has been the most active countries in this movement to restrict oil supply

However, with African countries increasing their production, the efficiency of the group's joint policy decreases. Despite this, members must find a solution, as the continuous decline in oil prices is not positive for OPEC+ members.

Image 3: OPEC African member countries' crude oil output (millions bpd)

Source: Refinitiv

The postponement of the OPEC+ meeting has intensified the volume of put options in the market

Meanwhile, the delay of the OPEC+ meeting had a significant impact on the derivatives market. If the meeting had taken place on November 26 as originally scheduled, holders of options on Brent could have captured market fluctuations by exercising their rights until November 27. However, now, market participants will need to use options from other months.

Ensuring protection against fluctuations in crude oil prices is crucial for producers who are facing challenges due to China's weak economic data and the risks of a recession in Europe. These factors pose significant challenges on the demand side. The absence of an agreement among OPEC+ members could result in an oversupplied crude oil market, intensifying the bearish outlook for 2024.

Image 4: Brent put option volume (Contracts)

Source: OPEC

In Summary

Within the energy complex, one of the most important institutions is OPEC+, whose decisions can impact the prices of major oil benchmarks such as WTI and Brent. Consequently, signs of discord among its members create significant bearish market turbulence.
Nevertheless, it is unlikely that a consensus will not be reached by the group, as joint action by member countries tends to benefit all of them with higher prices, which is important for countries highly dependent on oil revenue.

The 2024 outlook for energy commodities, while bullisher than 2023, remains quite challenging. Despite the possibility of interest rate cuts by the end of the first semester next year, the current restrictive level may lead the American economy to lower activity. Furthermore, Europe is on the brink of a recession, and China has been importing more oil than actually necessary.

Moreover, the exchange of hostages between Hamas and Israel, a significant humanitarian step, has brought a sense of relief to tensions in the region surrounded by oil-producing countries. This reduces the risks of disruptions in the oil supply through the Strait of Hormuz or from Iran.

From the perspective of oil-producing and exporting countries, providing support to prices will be crucial, as there are few fundamentals on the demand side to sustain higher increases in the short run. Therefore, measures need to be taken from the supply side, which is to say, in other words, cuts from OPEC+.

Weekly Report — Energy

Written by Victor Arduin
[email protected]
Reviewed by Livea Coda
[email protected]
www.hedgepointglobal.com

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