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OPEC Faces Difficult Choices in a Volatile Oil Market

The world’s major oil producers are finding themselves in a challenging situation. Oil prices have decreased, the global economy’s future is uncertain, and even though the Organization of the Petroleum Exporting Countries (OPEC) is working on reducing output, other producers such as the United States are increasing their supplies.

The originally scheduled year-end meeting for OPEC in Vienna has been postponed to Thursday, as the group discusses the difficult decision of whether to make further production cuts, and if so, by how much. This decision is likely to be challenging for many of the 23 member countries.

The price of Brent crude, the global benchmark, has dropped to around $82 a barrel from its peak earlier this year and even higher during the early stages of the Ukraine war, when it reached $128.

Despite the efforts of OPEC Plus, a larger group that includes Russia, to reduce production, it seems that the upcoming months will not offer much relief to oil producers from this challenging situation.

After a period of three years characterized by a recovery from the pandemic and significant growth in oil demand, it is expected that the demand will slow down in 2024. This is primarily due to the economic slowdown in China, which accounted for three-quarters of the global demand growth in 2023. Additionally, overall economic growth is forecasted to be modest, while more efficient energy usage and an increasing number of electric vehicles are expected to reduce oil consumption. With production projected to increase outside of OPEC Plus, there is expected to be little need for additional output from the producers’ group in the early part of 2024, and possibly beyond, as analysts suggest.

The weakened market is putting pressure on Saudi Arabia, the de facto leader of OPEC Plus, to continue and possibly further deepen production cuts. For example, Saudi Arabia and Russia might decide to extend the cuts of one million barrels a day and 300,000 barrels a day that they agreed to last summer into the new year. Russia’s reduction applies to its oil exports.

Some smaller OPEC producers, such as Nigeria and Angola, are being urged to accept lower production limits that better align with their recent output, while the United Arab Emirates has been granted a higher limit.

Richard Bronze, head of geopolitics at Energy Aspects, a research firm, stated, “There is a good chance the group will agree to some sort of additional cuts.”

At the same time, it is predicted that drilling activities in countries like the United States, Guyana, and Brazil, which are not part of OPEC, will likely increase output sufficiently to meet the additional global oil consumption expected in 2024 and potentially in the following years.

According to the International Energy Agency, global demand is anticipated to increase by a modest 930,000 barrels a day, an amount that could easily be met by production increases from non-OPEC Plus producers.

Amid the challenges faced by OPEC, the United States is thriving as an oil producer, accounting for 80% of the global supply increase in 2023, as per the I.E.A. In October, the United States pumped 19.8 million barrels a day, nearly matching the combined total from Russia and Saudi Arabia, the next two largest producers.

Operators outside OPEC generally have a vested interest in rapidly producing oil to recover their investments and generate profits.

Morgan Stanley analysts stated in a recent research note, “The pipeline of non-OPEC projects alone appears sufficient to meet all global demand growth in the next few years at least.”

Iran, an OPEC member exempt from cuts due to Western sanctions on its oil exports, is contributing to the supply increase. Analysts indicate that Iran has boosted its output by 30%, reaching 3.1 million barrels a day since 2021, according to data from the producers’ group.

Of course, unexpected events could disrupt these forecasts. The situation would be significantly different if the currently suspended conflict in Gaza were to escalate throughout the broader Middle East, where some of the world’s largest oil producers are located around the Persian Gulf, along with the sea lanes that transport their oil to customers.

For the time being, however, oil traders do not see a high likelihood of a broader conflict.

OPEC’s influence over the markets is diminished when non-OPEC countries are better positioned to meet increasing demand. Over the last year, OPEC Plus had to implement a series of cuts to support prices and prevent an accumulation of oil reserves in storage facilities.

While reducing production helped raise benchmark Brent crude prices above $90 a barrel in September, OPEC Plus has suffered from lost sales. The Saudis, who have borne the brunt of the cuts, are currently producing just nine million barrels a day, which is nearly two million barrels less than a year ago.

These cuts have also reduced the oil revenues crucial to Saudi Arabia’s government budget and its plans to invest in non-oil-related businesses, such as the LIV professional golf tour and Newcastle United, a soccer team in England’s Premier League.

For instance, during this month, Saudi Aramco, the national oil company, attributed a 23% decline in net income in the third quarter, a drop of $10 billion compared to a year earlier, partially to lower oil sales.

Gary Ross, chief executive of Black Gold Investors, an investment company, expressed, “We are getting not far from the point where quotas are becoming unrealistically low.”

Saudi Arabia is not the only producer feeling the squeeze. Abu Dhabi, the influential oil power within the United Arab Emirates, has engaged international partners to increase its production capacity to five million barrels a day but is required to maintain output at 3.2 million barrels under the quota set for 2024.

At present, analysts suggest that OPEC’s members appear to be endeavoring to maintain unity. After all, producers prefer $80 a barrel over the potential market collapse that could occur if Saudi Arabia were to increase production significantly, as it did in 2020 when prices plummeted by over 9% in a single day to around $45 per barrel.

Homayoun Falakshahi, an analyst at Kpler, a research firm, stated, “Not reaching an agreement is ‘a risk that OPEC Plus cannot afford to take.'”

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