OPEC+ output cuts may have no effect unless extended further

Analysts and traders surveyed by Reuters on December 11 indicated that OPEC+ 2.2 million barrel-per-day production cuts in the first-quarter of the New Year will be counterbalanced by a potential supply surplus, signaling a bearish outlook for oil prices. 

OPEC+ output cut announcements resulting from a November 30 meeting failed to move the needle on oil prices, prompting the Saudi Energy Minister to criticise commentators for failing to understand the deal. It also prompted an urgent trip for Russian President Vladimir Putin to Saudi Arabia, and a flurry of speculation that the cartel has lost its ability to move the market due to increased US output, according to Oil Price. 

Both Saudi Arabia and Russia have indicated that cuts may be extended beyond the first quarter of 2024; however, this has done little to assuage analyst concerns over what amounts to a short, three-month voluntary output cut agreement.

"I don't think a three-month cut is long enough to make a meaningful difference in terms of physical supply even if everyone stuck to it," Surrey Clean Energy director Adi Imsirovic told Reuters.

Analysts from both Macquarie and Investic echoed this sentiment in statements to Reuters. 

"Unfortunately, we won't have an idea of January output until the end of that month, and this is a long time in the oil market," Investic’s Callum Macpherson said, adding: "The cuts are only scheduled to last for three months and it can take up to one or two months for cuts to be implemented."

Macquarie also suggested cuts will need to be extended for an effect. 

The Energy Information Administration (EIA) showed that US average daily production in September was unchanged from its record-high rate in August of 13.24 million barrels. In the period from 2014-2016, the Saudis managed to disrupt American shale producers with output cuts that led to oil prices shedding 70 per cent. Now, however, American shale producers have consolidated and are less vulnerable to OPEC output decisions.